2. Capital Market

Chapter Overview

In this chapter, you will learn about investment capital, including what it is, why we need it, where it comes from, and who uses it. You will also learn about the different types of financial instruments that are traded in the financial markets. In discussing the financial markets themselves, we explain the difference between primary and secondary markets and between auction and dealer markets. Finally, you will learn about the electronic trading systems that are used in both equity and fixed-income markets.

Learning Objectives

Content Areas

1. Describe the role of investment capital in the economy: Including its supply and use.
2. Differentiate between the types of financial instruments: Used in capital transactions.
3. Describe the distinguishing features and operation of the various types of financial markets.

Key Terms

Key terms are defined in the Glossary and appear in bold text in the chapter.

• alternative trading system
• ask price
• auction market
• bid-ask spread
• bid price
• Canadian Securities Exchange
• Canadian Unlisted Board Inc.
• CanDeal
• CanPX
• capital
• CBID
• CBID Institutional
• common share
• dealer market
• equity securities
• ICE NGX Canada
• institutional investor
• investment advisor
• last price
• liquidity
• MarketAxess
• market maker
• money market
• Montréal Exchange
• NEO Exchange
• Nodal Exchange
• over-the-counter market
• preferred share
• primary market
• retail investor
• secondary market
• stock exchange
• Toronto Stock Exchange
• TSX Alpha Exchange
• TSX Venture Exchange
• unlisted market

Key Takeaways

The following points summarize the critical elements of this chapter:

• Investment Capital: Explains the importance of investment capital, its sources, and uses.
• Financial Instruments: Defines various financial instruments used in capital markets.
• Financial Markets: Describes the different types of financial markets, including primary, secondary, auction, and dealer markets.
• Electronic Trading Systems: Covers the role and functioning of electronic trading systems in current financial markets.

Frequently Asked Questions (FAQs)

Q1: What is investment capital?

Investment capital refers to the funds that investors use to purchase financial assets, such as stocks, bonds, and other securities. It is crucial for companies and governments to finance their operations and growth.

Q2: What are primary and secondary markets?

The primary market is where new securities are issued and sold for the first time, such as in an Initial Public Offering (IPO). The secondary market is where existing securities are traded among investors.

Q3: What is the difference between auction markets and dealer markets?

In an auction market, buyers and sellers submit competitive bids, and the highest bid is matched with the lowest ask price. In a dealer market, transactions are facilitated by dealers who hold an inventory of securities and quote the buy and sell prices.

Q4: How do electronic trading systems work?

Electronic trading systems use computer networks to facilitate the trading of securities, providing increased efficiency, transparency, and reduced trading costs.

Glossary

• Alternative Trading System (ATS): A non-exchange trading venue that matches buyers and sellers to fulfill orders.
• Ask Price: The lowest price a seller is willing to accept for a security.
• Auction Market: A market where buyers and sellers enter competitive offers simultaneously.
• Bid-Ask Spread: The difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept.
• Dealer Market: A market facilitated by dealers who maintain inventories and quote buy and sell prices.

Diagrams and Charts

Figure 1: Primary and Secondary Markets Diagram

    graph TD;
	    A[New Securities Issued] -->|Primary Market| B(Investors with New Securities);
	    B -->|Secondary Market| C[Investors Trading Securities];
	    C --> B;

Figure 2: Auction vs Dealer Markets Diagram

    graph LR;
	    A[Buyers] -->|Auction Market| B[Match Through Offers];
	    B[Match Through Offers] -->|Seller| C[Sellers];
	    A2[Buyers] -->|Dealer Market| D[Dealers (Bid-Ask Spread)];
	    D[Dealers (Bid-Ask Spread)] --> C2[Sellers];

Further Reading

• Investopedia: What is Capital?
• Financial Markets: Functions & Types

This chapter equips Canadian Securities Course candidates with foundational knowledge necessary to understand and navigate the capital market.

In this section

• 2.1 Introduction
  Capital Market Overview: notes, key concepts, and practice questions on securities industry, financial intermediaries, and financial markets for CSC exam prep.
• 2.2 Investment Capital
  Explore the role of investment capital in the economy, focusing on its supply, use, and differentiating between direct and indirect investments. Learn about economic value and the importance of productive investment.
  • 2.2.1 Characteristics Of Capital
    Characteristics Of Capital: notes, key concepts, and practice questions on Capital characteristics, mobility, sensitivity, and scarcity for CSC exam prep.
  • 2.2.2 Suppliers And Users Of Capital
    Suppliers And Users Of Capital: notes, key concepts, and practice questions on Suppliers of Capital, Investment Capital, and Canadian Economy for CSC exam prep.
• 2.3 Financial Instruments
  Financial Instruments: notes, key concepts, and practice questions on capital transactions, debt securities, equity securities, and derivatives for CSC exam prep.
• 2.4 Financial Markets
  Understand the features, operations, and types of financial markets. Explore the roles of intermediaries and the characteristics of effective markets.
  • 2.4.1 Primary And Secondary Markets
    Primary And Secondary Markets: notes, key concepts, and practice questions on Primary Market, IPOs, Toronto Stock Exchange, Stocks, and Bonds for CSC exam prep.
  • 2.4.2 Auction Markets
    Auction Markets: notes, key concepts, and practice questions on bid-ask spread, TSX, liquidity, stock exchanges, trades, and securities for CSC exam prep.
  • 2.4.3 Dealer Markets
    Dealer Markets: notes, key concepts, and practice questions on OTC Markets, Over-the-Counter, Debentures, Bonds, Trading, and Investment Dealers for CSC exam prep.
  • 2.4.4 Alternative Trading Systems
    Alternative Trading Systems: notes, key concepts, and practice questions on ATS, Canadian financial markets, equity trading, CanDeal, and CBID for CSC exam prep.
• 2.5 Summary
  Capital Market Summary: notes, key concepts, and practice questions on investment, bonds, debentures, equity, and financial markets for CSC exam prep.