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Chapter 15-16

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Rita Cossa

CHAPTER FIFTEEN – THE FINANCIAL SERVICES INDUSTRY IN CANADA The Financial Services Industry in Canada Participants in the Financial Services Industry  Credit unions: o Non-profit, member-owned financial cooperatives o Offer full variety of banking services to members  Trust company: o Administers estates, pension plans, agency contracts o Banks cannot do this  Non-banks: o Accept no deposits but offer other services provided by regular banks o Pension funds, insurance companies  Pension funds: money put aside for when employees retire  Commercial/consumer finance companies: o Offer short-term loans to businesses/individuals who cannot meet credit requirements of regular bank o Have higher interest rates How the Financial Services Industry Is Regulated  Financial industry is highly regulated  Can be regulated at federal or provincial level  Department of Finance (federal regulating body) has three agencies: o The Office of the Superintendent of Financial Institutions (monitors day-to-day operations of institutions) o Canada Deposit Insurance Corporation (protects deposits up to $100,000 for each customer in each financial institution) o The Financial Consumer Agency of Canada (monitors institutions to ensure they follow consumer protection measures) Why Money Is Important What Is Money?  Money: anything people generally accept as payment for goods/services  Barter: trading of goods/services for other goods/services directly  Standards of a useful form of currency: o Portability o Divisibility o Stability o Durability o Uniqueness (hard to copy, counterfeit) What Is the Money Supply?  Money supply: amount of money Bank of Canada makes available for people to buy goods/services  M1: money that can be accessed quickly and easily  M2, M2+, M2++: broader measures of money supply Why Does the Money Supply Need to Be Controlled?  Too much money being made will cause inflation  Too little money causes deflation  Could cause recession  Controlling money supply affects employment and economic growth/decline The Global Exchange of Money  Falling dollar value means amount of goods/services can buy with a dollar decreases  Rising dollar value means amount of goods/services can buy with a dollar goes up  Strong Canadian economy: demand for dollar is high, value rises  Weak Canadian economy: demand for dollar declines, value falls Control of the Money Supply  Bank of Canada manages rate of money growth by changing overnight rate  Change in overnight rate usually affects interest rates charged by commercial banks  Prime rate: interest rate banks charge most creditworthy customers  Rise in interest rates: o Consumers/businesses hold less money, borrow less, pay back loans o Slower growth in money  Interest rates fall: o People/businesses encouraged to borrow and spend more o Boosts economy The Banking Industry Commercial Banks  Commercial bank: o Profit-seeking organization that receives deposits from individuals/corporations o Uses funds to make loans  Make profit if revenue generated by loans exceeds interest paid to depositors Some Services Provided by Banks  Chequing account: o Deposit money and can write cheques to pay for stuff o Usually have service charge and demand minimum deposit  Term deposits: o Type of savings account o Earns interest that is delivered at end of specified period o Depositor does not withdraw funds until after specified term  Also offer: credit cards, lines of credit, loans, mortgages, ATM access, safe- deposit boxes, traveller’s cheques Electronic Banking on the Internet  All of Canada’s top banks allow customers to access accounts online  Can apply for loan online too  ING: o Internet bank o Offer high interest rates and low fees because do not have physical costs o People might not like sending money into the internet The Insurance Industry  Insurance companies collect insurance premiums from thousands of clients  Use to pay for cost of few catastrophes that will occur  Usually amount of claims paid out exceeds premiums collected  Insurance premiums (the selling price) are set before actual claims paid out  Premiums are higher when more claims are made The Canadian Securities Industry  Securities dealer: firm that trades securities for its clients and offers investment services  More people are investing in the equities market  Investors want to increase their returns Securities Regulations  Prospectus: condensed version of economic and financial info that company must make available to investors before they purchase the security  Securities commission must approve prospectus  Securities commission: government agency that administers provincial securities legislation  Ontario Securities Commission: o Protect investors from fraudulent practices o Foster fair/efficient capital markets o Maintain public/investor confidence in those markets  Canadian Securities Administration (CSA): o Brings provincial and territorial securities regulators together o Make policies/regulations that are consistent across country The Functions of Securities Markets  Stock exchange: organization whose members can buy/sell securities for companies and investors  Security: transferable certificate of ownership of a stock/bond  Securities markets: o Assist businesses in finding long-term funding o Provide private investors with place to buy/sell investments o Primary markets; handle sale of new securities o Secondary market: handles trading of securities between investors How to Invest in Securities  Stockbroker: registered representative who acts as intermediary to buy/sell securities for clients  Place order with stock exchange member who goes to place exchange where it is traded Investing Online  Can use online trading services to buy/sell stocks  Less expensive than using a stockbroker  Have to make own research to make investment decisions Choosing the Right Investment Strategy  Younger people can afford to make riskier investments  Can wait for stock to rise again  Old people may invest in bonds cause less risky  Investors consider five criteria: 1. Investment risk 2. Yield (rate of return) 3. Duration (length of time money is committed to investment) 4. Liquidity (how quickly can get back invested funds) 5. Tax consequences (how investment will affect tax situation) Investing in Bonds  Government bonds are secure investment because backed by government  Corporate bonds are more risky  Bond interest is taxable  Do not have to hold bond until maturity  Bond has fixed interest rate, does not fluctuate with market interest rate Investing in Stocks  Buying stock makes investor owner of the firm  Market price of share depends on overall performance of corporation in meeting business objectives  Capital gains: positive difference between purchase price of a stock and its sale price  Bulls: investors who believe stock prices are going to rise so buy stock in anticipation of an increase  Bears: investors who expect stock prices to decline so sell stocks  Growth stocks: stocks of corporations whose earnings are expected to grow faster than other stocks (ex. technology, biotechnology, Internet)  Income stocks: offer investors high dividend yield (public utilities)  Blue-chip stocks: o Of high-quality companies (Petro-Canada, CN) o Pay regular dividends and experience consistent growth  Penny stocks: o Cost less than $2 o Firms such as mining or oil companies o Risky investments  Market order: tells broker to buy/sell stock immediately  Limit order: tells broker to buy/sell tock at specific price Stock Indexes  Measure trend of different stock exchanges  Can tell people what stocks to invest in  Stocks will be included in index if qualify based on size and liquidity Buying on Margin  Buying on margin: purchasing securities by borrowing some of cost from broker  Broker holds them as collateral until pay balance due  If stock/bond drops owe broker even more Stock Splits  Number of owners falls as price of stock rises  Stock split: gives shareholders two/more shares of stock for each one they own  Split price of stock in half so can be cheaper  People who already bought just have double the amount Investing in Mutual Funds  Mutual fund: fund that buys stocks/bonds and sells units of ownership to the public  Mutual fund managers pick the best stocks/bonds  Different mutual funds invest in different kinds of stocks (not risky, kind of risky, very risky)  Diversification: buying different investment alternatives to spread risk of investing  Good fro small or beginning investors APPENDIX C – USING TECHNOLOGY TO MANAGE INFORMATION The Role of Information Technology  Data are raw, unanalyzed, unorganized facts and figures  Information is processed and organized data  Information technology (IT): technology that helps companies change business by allowing them to use new methods  CIO helps business use technology to communicate better with others How Information Technology Changes Business  IT allows businesses to deliver goods/services whenever and wherever good for customer  Online movies, shopping, stock exchange  Virtualization: accessibility through technology that allows business to be conducted independent of location  Makes communication faster and more efficient  Phone companies are making money through text messages (can charge more for them) Moving from Information Toward Knowledge and Business Intelligence  Knowledge technology (KT): allows data to come to individual  System can tell employee what to do (good for training, do not need supervisor)  Reduces time needed to find information  KT is now known as business intelligence systems (BI)  BI: variety of software applications that analyze an organization’s raw data and take insights from it  A business must be flexible and change as technology changes Types of Information  Business Process Information: o Transaction data gathered at point of sale o Info gained through enterprise resource planning, supply chain management, CRM systems  Physical-World Observations: o Observations from RFID’s, mini cameras, wireless access, GPS o Technology that records where people are located and what they are doing  Biological Data: o Fingerprinting, retina scanners, voice/face recognizers o Used to identify people for security purposes  Public Data: o Info on the Internet that is free and accessible  Data that Indicate Personal Preference or Intentions: o Internet shoppers leave trail of info that reveals personal likes/dislikes Managing Information  Infoglut: overload of information  Usefulness of management info depends on four characteristics: 1. Quality (accurate and reliable) 2. Completeness (enough info to make a decision but not too much) 3. Timeliness (reaches managers quickly) 4. Relevance Storing and Mining Data  Must store, sort and get useful info to the right people at the right time  Data warehouse: stores data on a single subject over a specific period of time  Data mining: looking for hidden patterns/relationships in a data warehouse The Road to Knowledge: The Internet, Intranets, Extranets and Virtual Private Networks  Intranet: o Companywide network that uses Internet-type technology o Closed to public access o Constructs firewall between themselves and outside world o Protects corporate information from competition  Extranet: o Semi-private network o Uses internet technology o Allows more than one company to access same info o Allows people on different servers to collaborate o Used to extend and intranet to outside companies  Virtual private networks (VPN): o Private data network that creates secure connections over regular Internet lines o Inexpensive way to protect shared lines from hackers The Front Door: Enterprise Portals  Portals: o Entry points to email, financial records, schedules, etc. o Identify users and allow them to access areas of intranet Broadband Technology  Traffic on internet has increased which slows connection  Broadband technology: o Offers users continuous connection to Internet o Allows them to send/receive large files (voice, video)  Data reaches the person faster than dial-up connections  Internet2: o New Internet system o Links government and select group of universities o Supports videoconferencing, collaborative research, distance education, digital libraries o 22,000 times faster than public internet o Users who pay more get more bandwidth The Enabling Technology: Hardware  Hardware: computers, pagers, cell phones, printers, scanners, fax machines Cutting the Cord: Wireless Information Appliances  Wireless networks use Wi-Fi  Wireless fidelity: connect to web and download 50 tim
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