1.1.2 Current Structure of the Market

The Canadian securities industry is an intricate network that plays a crucial role in the nation’s economy by facilitating the flow of capital from investors to entities that need funds for growth and development. Understanding the current structure of this market is essential for anyone entering the financial sector, especially those preparing for the Canadian Securities Course (CSC®) Certification Exams.

Primary vs. Secondary Markets

Primary Markets

The primary market is where new securities are issued and sold for the first time. Companies, governments, and other entities raise capital by offering stocks or bonds to investors through this market. In the primary market, securities are offered to the public in an event known as an Initial Public Offering (IPO) for stocks, or a bond issuance for fixed-income securities. The keys to the primary market include:

• Underwriting: Investment banks typically underwrite the securities, helping the issuer set the price and sell the securities to investors.
• Direct Sales: Some issuers may sell the securities directly to the public without the intermediary of an investment bank.
• Price Determination: The initial sale price in the primary market is set by the issuer with the advice of the underwriting firm.

Secondary Markets

The secondary market involves the buying and selling of previously issued securities. It provides liquidity and the means for markets to redistribute securities among investors. In Canada, major secondary markets include the Toronto Stock Exchange (TSX), TSX Venture Exchange (TSXV), and Canadian Securities Exchange (CSE). Key attributes include:

• Liquidity and Price Discovery: Secondary markets offer a venue for continuous buying and selling which aids in price discovery and liquidity provision for securities.
• Brokerage Firms: These are the intermediaries facilitating transactions between buyers and sellers.
• Regulated Exchanges and OTC Markets: Most trading occurs on regulated stock exchanges, but some securities may also be traded over-the-counter (OTC).

    graph LR
	  A[Primary Market]
	  A --> B1[IPO]
	  A --> B2[Bond Issuance]
	  A --> B3[Direct Sales]
	
	  C[Secondary Market] --> D1[TSX]
	  C --> D2[TSXV]
	  C --> D3[CSE]
	  C --> D4[OTC Markets]

Organizational Structure

The organizational structure of the securities industry in Canada is intricate, with numerous participants, each playing distinct roles to ensure the industry’s smooth operation. This structure includes:

Exchanges

Exchanges like the TSX and Canadian markets are central to the trading of securities, providing the infrastructure for the listing and trading of stocks and derivatives. They are essential in:

• Price Listing: Offer live data feed of stock prices.
• Electronic Trading Platforms: Provide the means for electronic trading of securities.
• Regulatory Compliance: Ensure trading practices follow national and international standards.

Clearing Houses

Clearing and settlement involve the transfer of the ownership of securities post-trade. Key Canadian institutions include The Canadian Depository for Securities (CDS):

• Clearing Services: Verification and finalization of trades.
• Risk Management: CDS works to minimize systemic risks in the settlement process.

Market Participants

These include brokerage firms, investment banks, and individual investors who engage in the buying and selling of securities:

• Intermediaries: Facilitate trades between buyers and sellers.
• Analysts: Provide investment guidance.
• Institutional Investors: Include entities like pension funds and mutual funds.

Market Segments

The Canadian securities market is divided into various segments, each focusing on different types of securities:

Equity Market

This market consists of shares and stocks of public companies:

• Common Shares: Ownership stakes with voting rights.
• Preferred Shares: Provide dividends but usually without voting rights.

Fixed-Income Market

Highlighting government and corporate bonds, which yield interests and are often considered safer investments:

• Government Bonds: Issued by federal and provincial governments.
• Corporate Bonds: Issued by corporations looking to fund ventures.

Derivatives Market

This consists of financial instruments like options and futures, which derive their value from underlying assets:

• Options: Contracts giving the right but not the obligation to buy/sell assets.
• Futures: Standardized contracts obligating sale/purchase of assets at a future date.

Summary

The Canadian securities industry is a key component of the country’s financial infrastructure. Understanding its structure — encompassing primary and secondary markets, as well as a diverse organizational framework and segmentation into different markets such as equity, fixed income, and derivatives — is essential for financial professionals in Canada. This solid grounding supports the investor’s ability to navigate the complex landscape and make informed investment decisions.

Glossary

• IPO: Initial Public Offering, the first sale of a company’s shares to the public.
• TSX: Toronto Stock Exchange, the main stock exchange in Canada.
• CDS: Canadian Depository for Securities, responsible for clearing and settling trades in Canada.
• Options: Derivative contracts giving the right, but not obligation, to buy/sell an asset.
• Futures: Contractual obligation to buy/sell an asset at a predetermined future date and price.

Additional Resources

• Toronto Stock Exchange (TSX) Website: www.tsx.com
• The Canadian Depository for Securities (CDS) Overview: www.cds.ca
• Official CSC® Examination Guide

By thoroughly understanding these components, participants in the Canadian Securities Course can better grasp the intricate mechanisms of the financial environment they will operate in, paving the way toward a successful career in securities.