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Retail firms
full service and discount brokerage firms for individuals.
Institutional firms
includes pension funds, mutual funds, and insurance companies.
Integrated firms
contains all aspects of retail and institutional firms.
Front office
in charge of portfolio management, marketing, sales, and trading.
Middle office
in charge of compliance, accounting, audits, and legal.
Back office
in charge of settlements and clearing.
Schedule I banks
large domestic banks. There are ownership restrictions on shares - must be widely held.
Schedule II banks
large foreign banks. Can do same activities as domestic banks.
Schedule III banks
foreign branches of banks. They are limited, with a more institutional focus.
Trust company
acts as a trustee.
Auction market
market in which securities are bought and sold by brokers acting as agents for their clients (stock exchanges).
Dealer market
a network of marketplaces. Here, trades are conducted OTC and consist of bonds and debentures.
Equity electronic trading system
competes with existing exchanges. They can only trade stocks that are on an existing exchange. They may have benefits such as different hours, better commission, etc.
Fixed-income electronic trading system
where almost all bonds are traded (such as CanDeal).
Structured product
has the characteristics of debt, equity, and the investment fund (can be in the form of principal-protected notes or index-linked guarantees).
IIROC (Investment Industry Regulatory Organization of Canada)
the Canadian investment industry's SRO. It carries out its responsibilities through setting and enforcing rules regarding the proficiency, business, and financial conduct of dealer firms and their registered employees.
MFDA (Mutual Fund Dealers Association)
the SRO that regulates the distribution (dealer) side of the mutual fund industry in Canada.
OSFI (Office of the Superintendent of Financial Institutions)
the federal regulatory agency whose main responsibilities regarding insurance companies and segregated funds are to ensure that the companies issuing the funds are financially solvent.
CDIC (Canadian Deposit Insurance Corporation)
a federal Crown Corporation providing deposit insurance against loss (up to $100,000 per depositor) when a member institution fails.
CIPF (Canadian Investor Protection Fund)
a fund that protects eligible customers in the event of the insolvency of an IIROC dealer member.
General acct. = $1M total
Separate acct. = $1M each
MFDA IPC (Mutual Fund Dealers Association Investor Protection Corporation)
provides protection for eligible customers of insolvent MFDA member firms.
General acct. = $1M total
Separate acct. = $1M each
Gatekeeper
protects markets from potentially illegal client activity by collecting information, monitoring activity, and reporting suspicious behaviour.
"Know your client" rule
salespersons must use diligence to learn essential facts about the client (including every account and order) before entering into the relationship, in order to make appropriate decisions for the client.
Ombudsman for Banking Services and Investments (OBSI)
an independent organization that investigates customer complaints against financial services providers (non binding, but may hurt the company's reputation if it does not comply).
Front running
when a broker puts his own account's order in front of a customer's order, knowing the customer's order will move prices so the broker can make a profit.
National "Do not call" List (DNCL)
prohibits telemarketers from calling any number on the list that has been registered for 31+ days.
Expansion
characterized by stable inflation, adequate inventory, start-ups exceed bankruptcies, strong stock market, rising market activity (leading indicator), and falling unemployment.
Peak
when demand outstrips capacity, wages rise, interest rates fall, sales decline, and inventory rises. Stock prices decline, and market activity declines.
Contraction
when economic activity declines, profits decline, spending declines, and saving increases.
Trough
when the bond market rallies (prices rise as rates fall), and consumers start spending again.
Recovery
when GDP returns to its previous peak, investment rises, and inflation is set to fall further.
Current account
includes the exchange of goods between Canadians and foreigners, earnings from individual income, dividends, and transfers for foreign aid.
Capital and financial account
includes the financial flows between Canadians and foreigners (selling assets or borrowing funds to deal with surplus/deficit).
Leading indicators
peak and trough before the overall economy (such as housing starts or stock market indexes).
Coincident indicators
change at the same time as the market - GDP.
Lagging indicators
change after the economy, such as unemployment.
Natural unemployment rate
the unemployment rate when the economy is at full employment.
Higher interest rates
Increase cost of capital = leading to lower investment
Discourages consumer spending
May lead to economic slowdown
Exchange rates
increased by rising interest rates or sale of commodities.
Fiscal policy
In charge of: Govt. spending, taxation, borrowing, and Federal Budget
Monetary policy
In charge of: Canadian financial system (regulation, clearing, and settlement), Issuing bank notes, Act as Govt. fiscal agent (banker)
Overnight market
when the BOC changes the target overnight rate, other short-term and long-term rates tend to follow. It is based on a 50 basis point (0.5%) operating range.
Bank rate
the upper limit of the overnight operating interest rate band.
Sale and Repurchase Agreements (SRAs)
an open-market operation by the Bank of Canada used to offset undesired downward pressure on overnight financing costs. Used when the Govt. wants to slow down the economy a bit.
Special Purchase and Resale Agreements (SPRAs)
an open-market operation by the Bank of Canada used to relieve undesired upward pressure on overnight financing rates. Used to stimulate the economy.
Drawdown
a transfer from banks to the BOC to lower the money supply.
Redeposit
a transfer from the BOC to the banks to raise the money supply.
Liquid bonds
bonds with good trading volumes, where large trades are quick and prices are not affected (have a ready market).
Marketable bonds
have a ready market, but not liquid - such as private-placements (cannot be sold on the secondary market).
Negotiable bonds
bonds that are in "good delivery form" (easy to transfer ownership). In some ways, this is an antiquated concept (where bonds were physical). All bonds that trade on the market today are considered to be in "good delivery form".
Convertible bond
a bond with an option allowing the bondholder to exchange the bond for a specified number of shares of common stock in the firm.
If the stock price < conversion price = acts like bond.
If the stock price > conversion price = acts like stock.
Sinking fund
sums of money set aside out of earnings each year to provide for the repayment of all or part of a debt issue at maturity (mandatory).
Purchase fund
set up to retire a specific amount of bonds through purchases in the market, if they can be made at or below a stipulated price.
Negative pledge provision
a protective provision written into the trust indenture of a company's debenture issue providing that no subsequent mortgage bond issue may be secured by all or part of the company's assets, unless at the same time the company's debentures are similarly secured.
T-bills
Government of Canada bonds that mature in 3-month, 6-month, or 12-month maturities. They do not pay interest, but are instead sold at a discount and mature at par. The return is taxable as income, and not a capital gain.
Canada Savings Bonds (CSBs)
a type of savings product that pays a competitive rate of interest and that is guaranteed for one or more years. They may be cashed at any time and, after the first three months, pay interest up to the end of the month prior to being cashed.
Banker's Acceptance
a short-term commercial draft sold at a discount (similar to a T-bill).
Commercial Paper
a short-term corporate money market security.
Escalating GIC
the interest rate for these GICs increases over the term.
Laddered GIC
the investment for these GICs is evenly divided into multiple-term lengths. As each portion matures, it can be reinvested or redeemed (this diversification reduces interest rate risk).
Instalment GIC
an initial lump sum contribution is made for these GICs, with further minimum contributions made weekly, bi-weekly, or monthly.
Index-linked GIC
these GICs guarantee a return of the initial investment at expiry and some exposure to equity markets.
Interest-rate linked GIC
these GICs offer interest rates linked to the change in other rates such as the prime rate, the bank's non-redeemable GIC interest rate, or money market rates.
T-bill yield
[(100-Price)/Price] x (365/term) x 100
Current yield
Annual dollar amount of interest/Current market price
Bond selling at a discount
If bond price is less than $1000.
Bond selling at a premium
If bond price is greater than $1000.
Expectations theory
says that current LT interest rates foreshadow future short-term rates. According to this theory, investors buying a single LT bond should expect to earn the same amount of interest as they would buying two ST bonds of equal combined duration.
Liquidity preference theory
says that investors prefer ST bonds because they are more liquid and less volatile in price.
Market segmentation theory
says that the yield curve represents the supply and demand for bonds of various terms, which are primarily influenced by the bigger players in each sector.
Reinvestment risk
the risk that the coupons cannot be reinvested at the same interest rate that prevailed at the time of purchase.
Duration
a measure of the sensitivity of a bond's price to changes in interest rates (takes both maturity and coupon rate into account). The longer it is, the more a bond's price will change for a given change in interest rates.
Accrued interest
Interest that has built up but has not yet been paid. Pay both the stated asking price for the bond + Interest from the previous period.
Stated asking price x [Coupon rate x (term/365)]
Common share advantages
Potential for capital appreciation
Dividends
Favourable tax rate
Voting rights
Limited liability
Marketability
Dividend record date
date which recorded shareholders receive the dividend.
Cum dividend
up to the 2nd business day before record date.
Ex dividend
1 day before record date.
Dividend Reinvestment Plan (DRIP)
an investment plan that allows the investor to automatically reinvest stock dividends in the same company's stock without paying any brokerage fees
Subordinated voting
where shares are given preferential treatment (e.g. Class A shares = 1 vote/share; Class B shares = 10 votes/share)