2.1 Introduction

Introduction

The securities industry plays a significant role in sustaining and expanding the Canadian economy. The industry is growing and evolving to meet the ever-changing needs of Canadian investors, from both domestic and international perspectives. The vital economic function the securities industry serves is based on a straightforward process: the transfer of money from those who have it (suppliers of capital) to those who need it (users of capital).

Key Elements of the Securities Industry

Three elements are of central importance to the securities industry: financial intermediaries, financial markets, and financial instruments. In the previous chapter, we focused on the intermediaries that have evolved to enable the transfer of capital, such as investment dealers, banks, and trust companies.

Financial Intermediaries

Financial intermediaries facilitate the transfer of capital between suppliers and users. Prominent examples include banks, investment dealers, and trust companies that serve diverse functions within the financial landscape.

Financial Markets

Financial markets are platforms where financial assets are traded. These markets ensure liquidity and establish effective price discovery mechanisms. Major types include:

1. Primary Markets - where new securities are issued and sold by corporations and governments.
2. Secondary Markets - where previously issued securities are bought and sold among investors.

Financial Instruments

Several financial instruments exist to transfer capital, including equities, bonds, mutual funds, and derivatives. Each instrument varies in terms of risk, return, and structure. We will provide a brief overview of these instruments later in this chapter.

Characteristics of Capital

Understanding the characteristics of capital is essential for making informed investment decisions. Capital can be divided into equity capital and debt capital, each with unique features and implications for investors and issuers.

• Equity Capital: Represents ownership in a company, commonly through stocks. It offers potential for appreciation and dividends but comes with higher risk.
• Debt Capital: Involves borrowing funds that must be repaid over time with interest. Bonds and debentures are prime examples and are generally perceived as lower-risk investments compared to equities.

Key Takeaways

1. Significance of the Securities Industry: It is pivotal for Canada’s economic growth and stability.
2. Role of Financial Intermediaries: Essential for facilitating the transfer of capital between suppliers and users.
3. Understanding Financial Markets and Instruments: Fundamental for making informed investment choices.
4. Characteristics of Capital: Distinguishing between equity and debt capital is critical for financial planning.

Frequently Asked Questions (FAQs)

What are the main roles of financial intermediaries?

Financial intermediaries primarily facilitate the transfer of capital, provide investment advisory services, and help manage risks through diversified portfolios.

What is the difference between primary and secondary financial markets?

• Primary Markets: Involve the issuance of new securities directly from issuers to investors.
• Secondary Markets: Feature the trading of already issued securities among investors.

What are the common financial instruments?

Common financial instruments include equities (stocks), debt instruments (bonds), mutual funds, and derivatives (options, futures).

Glossary of Terms

• Financial Intermediaries: Institutions like banks and investment firms that facilitate capital transfer.
• Primary Market: Market where new securities are issued and sold for the first time.
• Secondary Market: Market where existing securities are traded among investors.
• Equity Capital: Funds raised by a company in exchange for ownership shares.
• Debt Capital: Borrowed funds that must be repaid with interest.

    graph TD
	    A[Suppliers of Capital] -->|Funds| B[Financial Intermediaries]
	    B -->|Investment| C[Financial Markets]
	    C -->|Allocation| D[Users of Capital]

The diagram above illustrates the flow of capital in the securities industry, from suppliers through intermediaries to users.