UNIT ONE: what is personal finance management

What is financial planning?

It’s a step-by-step process that helps you identify and reach your financial goals by clarifying where you are now, where you want to go, and what you need to get there.

What can you do with your money?

Spend it, save it, invest it, donate it, or put it into your RRSP and RESP

What are examples of investments?

Stocks (common and preferred shares), bonds (government and corporate), fixed income products (GICs and term deposits), and mutual funds.

What does RESP stand for and what is it for?

Registered Education Savings Plan — for education.

What does RRSP stand for and what is it for?

Registered Retirement Savings Plan — for retirement, housing, or education.

What is the capital market?

A place where financial products like stocks and bonds are bought and sold.

How do businesses and governments raise funds in the capital market?

By selling securities to individuals and institutional investors like pension funds.

What are the three parts of the capital market?

The stock market, bond market, and banking system.

What is a bank?

An institution that deals in money and provides financial services by accepting deposits and making loans.

What is the primary function of banks?

To put depositors’ money to use by lending it out to others for homes, cars, education, or businesses.

How do banks create money in the economy?

By making loans; lending increases money flow and economic activity.

What affects how much money banks can lend?

The liquidity ratio (reserve requirement) set by the Bank of Canada.

What is the typical range for the liquidity ratio?

Between 3% and 10%.

Example: If TD Bank has $100,000 in deposits and a 3% reserve requirement, how much can it lend?

It must keep $3,000 in reserve and can lend $97,000.

Why is a low reserve ratio beneficial for the economy?

It allows banks to lend more money, increasing spending and economic growth.

Why can a high reserve ratio be harmful?

It restricts lending, reducing economic activity.

What are bonds?

IOUs (debt securities) where you lend money at a set interest rate for a specific time (1–30 years).

Who issues bonds?

Governments (federal, provincial, municipal) and corporations.

Which bonds are safer—government or corporate?

Government bonds are safer (less risky).

Why do governments issue bonds?

To fund schools, hospitals, highways, and public projects.

Why do corporations issue bonds?

To expand businesses, buy companies, or open new factories.

Why are bonds considered safe investments?

Because issuers must pay interest before dividends and bonds are often backed by assets.

If a company goes bankrupt, who gets paid first—bondholders or shareholders?

Bondholders.

What is the stock market?

Part of the capital market that connects buyers and sellers of company shares.

What is Canada’s main stock exchange?

The Toronto Stock Exchange (TSE).

What does the New York Stock Exchange still maintain?

It still maintains a physical trading floor.

Why do businesses sell shares?

To raise money (equity financing) for operations and growth.

What are the two main types of shares?

Common shares and preferred shares.

What are advantages of common shares?

Partial ownership, voting rights, possible dividends, and share value increases if the company prospers.

What are disadvantages of common shares?

Dividends may not be paid, share value can drop, and shareholders are last in line in bankruptcy.

What is a dividend?

A portion of a company’s profit paid to shareholders.

What are advantages of preferred shares?

Set dividend, paid before common shareholders, and rank higher in bankruptcy.

What are disadvantages of preferred shares?

Set dividends don’t usually increase, and shareholders can’t vote for company directors.

What is the S&P/TSX Composite Index?

An index of the top 300 companies in various sectors listed on the Toronto Stock Exchange.

How many companies are listed on the TSX?

About 3,400.

What does “composite” mean in the S&P/TSX Composite Index?

That all the included companies are grouped (stacked) together to represent the market.