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
  Comprehensive overview of the securities industry's role in the Canadian economy, discussing the transfer of capital, the importance of financial intermediaries, markets, and instruments.
• 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
    Understand the key characteristics of capital in the context of investment management, including mobility, sensitivity, and scarcity.
  • 2.2.2 Suppliers And Users Of Capital
    Explore the determinants of capital supply and usage in Canada, identifying key players and their roles in the financial ecosystem. This guide elaborates on the sources like individual savings, corporate revenues, and government surplus while detailing the diverse requirements for capital among individuals, businesses, and governments.
• 2.3 Financial Instruments
  Discover the various types of financial instruments used in capital transactions, including debt securities, equity securities, derivatives, managed products, and structured products, along with examples and key features.
• 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
    Learn the intricacies of the primary and secondary markets, how they function, and their roles in the financial ecosystem. Dive into the specifics of initial public offerings (IPOs), trading mechanisms, and much more.
  • 2.4.2 Auction Markets
    Understand the workings of auction markets, including key concepts like bid-ask spreads, trades, and types of stock exchanges in Canada. This section covers the fundamental aspects of how securities are bought and sold and includes detailed examples and key definitions.
  • 2.4.3 Dealer Markets
    Exploring the workings of dealer markets, including the over-the-counter trading of bonds, debentures, and unlisted equities. The guide illuminates the methods and advantages of trading in dealer markets and synthesizes regulatory nuances in Canada.
  • 2.4.4 Alternative Trading Systems
    Learn about Alternative Trading Systems (ATS) in the Canadian financial markets, covering electronic marketplaces for equity and fixed-income markets.
• 2.5 Summary
  Summary of key concepts of capital markets covered in Chapter 2.