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Economic Factors SOS NOTES.docx

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Leanne Hagarty

Four pillars of Canadian financial system 1. Chartered Banks: TD, CIBC  Description: o Regulated by governments and the bank charters them o Privately owned: anyone purchases stocks o Anyone puts money in and borrows money- largest service/ most important  Takes your money and loans it to others (Deposit expansion)  Roles/Functions: o In order to grow, banks invest in other areas  Ex. TD bought trust union as TD CANADA TRUST (now it can open trading accounts and invest) o Major source of short term loans for businesses  Secured loans: (EX MORTGAGE) – pledge house to bank  Unsecured loans: (EX CREDIT CARDS)- nothing pledged - EX OF CHARTERED BANK: Bank of Canada o Description: open market operations o Tools for affecting money supply  Banks come here to get loans and BoC sets interest rates (bank rates) 2. Alternate Banks: WESTERN  Description: trust companies and credit unions  Roles/Functions: local banks 3. Specialized Lending/Saving intermediaries  Description: life insurance companies, venture capitalist firms, pension funds  Roles/Functions: o Insurance companies invest money you invest o Venture capitalists lend your money to risky businesses that will prosper 4. Investment Dealers: SUNLIFE/MANULIFE  Description: facilitate trade of securities (stocks, bonds and other products).  Roles/Functions: middle-man between corporations and investors o Primary markets: investment bankers advise/underwrite/distribute o Secondary markets: Toronto stock exchange Changes in banking industry - Deregulations:  Consumers want cheaper/better services  Have consumers but can’t raise rates or they will become regulated by Gov. - Consumer demand - Competition from foreign banks (although foreign banks can only limitedly compete in Canada) Investment vehicles Primary market: buying an initial public offering (or an idea) you trade that in the primary market Secondary markets: trades stocks that have already been traded before Types of investment vehicles: Stocks: Bonds:  EXAM: compare and contrast stocks and bonds Other types: EQUITY investment  Blue-chip (large companies with a lot of capital issue them- priced high with high market capitalization (# of shares x share price),  Small-cap (small market capitalization- low price and/or number of shares in market are low  Penny stocks- priced under a dollar 3 most popular debt-financing methods:  Canada savings bonds  Guaranteed investment certificates  Treasury bills: way for government to raise money Mutual funds: want to invest in food retailer, software, mining, etc. but have limited capital . . . so we pool money with such a group of people  Depress risk by diversifying portfolio so that if a certain market takes downfall, the diverse portfolio can counteract risk Options: gives you choice to sell/buy share(s) at any particular price and quantity in the future STOCKS Form of equity investment:  No fixed term (valid until company goes bankrupt),  Variable return o Capital gain: difference between paid and made o Dividend: BOD decides to give discretionary payments (incentives to shareholders) – completely based on what BOD wants to do depending on business-plan.  Purpose: Maintaining existing and attracting new shareholders o Risky investments because we don’t know how much dividends we should expect; there are no guarantee you will make/receive money.  Shareholders right to vote: investment for projects, and elect a BOD with however many shares they have (one share=one vote)  Preferred Stock: guaranteed a dividend in exchange for voting rights o Common shareholders: receive dividend after preferred shareholders… therefore if there is 100$ declared dividend if there are 80 preferred, they will get a dollar each while the other 20 will be split) o Common stock:  Taking most risk (thus have most say/ voting rights)  Quick capital growth (volatility) o Preferred stock:  Next in line (after the bond holders)  Usually bad news when they have a vote: missed dividend payments (to them) gives them voting rights  Regular income payments  Hardly any risk: cumulative payments (make sit more safe and similar to a bond)  Disadvantage: locked in (4% dividend every year until you sell stock) committed and set to dividend rate Factors that affect Stock Price  S
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