CSI Global Education Inc.

1. The Canadian Investment Marketplace CHAPTER 1: The Capital Market CSI Global Education Inc.

2. Chapter1---The Capital Market Chapter outline: What is investment capital? What are the sources and users of capital? What are the financial instruments? What are the financial market?

3. Learning Objectives • Define investment capital, describe its role. • Describe supply and use of capital. • Types of financial instruments. • Role of financial market, types of financial market. • Private equity.

4. The Role of Capital Markets “To bring together suppliers and users of funds.” Financial markets drive economic growth by transferring Money from those who have it (savers)-------->those who need it (users) Three key components of the securities industry: Financial instruments Financial markets Financial intermediaries

5. The Role of Capital Markets • capital is wealth example: land and buildings ,savings, stocks and bonds, • Capital savings can be used directly —Direct Investment , (e.g., land, building, equipment) • Capital savings can also be harnessed indirectly — Indirect Investment (e.g., stock, bonds, treasury bills)

6. Characteristics of Capital Why do we say that capital is: • Mobile • Sensitive----political ;economic trends; fiscal policy monetary policy ; opportunities ;labor force • Scarce---It is in great demand everywhere

7. Sources of Capital “The only source of capital is savings.” What are the implications of this for the economy and for the operation of financial markets?

8. Main Sources of Investment Capital Individuals through savings • Retail investors are individual investors who buy and sell securities for their own personal accounts • Institutional investors are organizations, such as a pension fund or mutual fund company Foreign Direct Investment Retail Investor Institutional Investor

9. Main Users of Investment Capital • Individuals • Businesses All levels of Government: • Federal ----budget deficit---budget surplus • Provincial • Municipal----installment debentures----serial debentures

10. Financial Instruments • Debt Instruments---bond • Difference between bonds and debentures: bond is secured by specific assets, debenture is secured only by the general credit of the issuer • Equity Instruments---Stocks common shares and preferred shares • Investment Funds---mutual fund • Derivatives---option, futures

11. Financial Instruments • Other investment products---income trusts, exchange-traded funds(ETFs)

12. Financial Markets Categories: By product/instrument • Money market • Stock market(s) • Bond market(s) • Etc.

13. Financial Markets By “Distribution” • Primary---the market where a security is sold when • it is first issued and sold to investors. IPO---initial public offering • Secondary---individual investors trade among themselves. secondary market provides liquidity

14. Financial Markets liquid market is characterized by: • Frequent sales • Narrow price spread between bid and offering prices • Small price fluctuations from sale to sale

15. Financial Markets By Method of Operation • Auction markets---clients’ bids and offers for a stock are channeled to a single central market and compete against each other. • Bid price is the highest price a buyer is willing to pay. • Ask Price is the lowest price a seller will accept. • Dealer markets---a network of dealers who trade with each other OTC (over-the-counter )market= dealer market Almost all bonds and debentures are sold through dealer markets.

16. Financial Markets By Longevity • Short – Money • Long – Capital

17. Primary and Secondary Markets Questions: • What are the main features of the primary and secondary markets? • How do these two markets differ?

18. Primary and Secondary Markets Primary Markets: • Deals with the issue of new securities. • Funds flow from an investment dealer to the firm. • The new securities are then sold at a higher price to the public. Secondary Market: • Deals with already existing and outstanding securities. • Trading occurs between investors, not the company.

19. The Markets Money Market • Any debt maturing within one year, regardless of when issued • Treasury-bills, Bonds with < 1yr maturity, Bankers’ Acceptances • Debt instruments only Capital Markets • Longer term securities (stocks, bonds > 1 yr) • Conducted through dealer markets (OTC) and auction markets(exchanges)

20. Auction and Dealer Markets • The auction and dealer markets are the two main ‘types’ of markets. Discussion: • What are the main features of each? • How are they alike and how do they differ?

21. Auction Markets • Toronto Stock Exchange (TSX) • TSX Venture Exchange (TSX V) • The orders of individual buyers and sellers are entered todetermine prices • Prices are established according to supply and demand forces • Form of competitive bidding

22. Auction Markets Exchanges: • Enforce membership conditions • Monitor/audit members • Set trading rules • Control listing and trading of companies

23. Dealer Markets • Also called over-the-counter (OTC) market or the unlisted market • A negotiated market where a network of dealers trade with each other • Dealers post bid and ask prices (Bid $1.50/Ask $1.60) • Profit is made on the spread • Bonds are sold on dealer markets

24. What is a Stock Exchange? A marketplace where buyers and sellers of securities meet under competitive conditions to trade with each other, and where prices are established according to the laws of supply and demand.

25. Stock Market Criteria What are the criteria for a stock exchange to function efficiently? 1. Low transaction costs 2. Liquidity 3. Timely and accurate information on price and volume 4. Consumer protection

26. A Liquid Market Liquidity is fundamental to the operation of a stock exchange. Liquidity is characterized by: • Frequent sales • Narrow price spreads • Small price fluctuations

27. Private Equity • is the financing of firms unwilling or unable to find capital using public means. • Higher return, higher risk. • It complements publicly traded equity by allowing businesses to obtain financing when issuing equity in the public markets may prove difficult or impossible. Several means used: Leveraged Buyout Early Stage Venture Capital Growth Capital Late Venture Capital Turnaround Distressed Debt

28. History, Size of Private Equity • The growth of private equity has been remarkable over the last 25 years. • Public and private pension plans, endowments, foundations, and wealthy individuals are the main investors in the private equity market.