Study guide
1.4 Investment Capital, Financial Instruments & Financial Markets
Canadian Securities Course CSC
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1 Introduction & Exam Overview
About the CSC Exams
2 Chapter 1: The Canadian Investment Marketplace
1.1 The Canadian Securities Industry & the Investment Dealer's Role 1.2 Financial Intermediaries: Banks, Trusts, Credit Unions, Insurers & Pension Funds 1.3 Financial Market Trends 1.4 Investment Capital, Financial Instruments & Financial Markets 1.5 Canadian Exchanges, ATSs, Dark Pools & the Order Protection Rule 1.6 Canadian Securities Regulators, the CSA & CIRO 1.7 Investor Protection: OSFI, CIPF and CDIC 1.8 Ethics, Standards of Conduct & the Client Focused Reforms 1.9 Conflicts of Interest, Complaint Handling & Remediation
3 Chapter 2: The Economy
2.1 Economics Foundations & Measuring Economic Growth 2.2 The Business Cycle & Economic Indicators 2.3 Inflation & Interest Rates 2.4 The Labour Market & Unemployment 2.5 The Bank of Canada & the Inflation-Control Target 2.6 Implementing Monetary Policy: The Operating Band, Market Operations & Transmission 2.7 Fiscal Policy, Deficits & the Challenges of Government Policy 2.8 International Finance & Trade: The Balance of Payments and the Canadian Dollar
4 Chapter 3: Features and Types of Fixed-Income Securities
3.1 The Fixed-Income Marketplace, Bond Terminology & Security 3.2 Protective Covenants, Retirement Provisions & Extendible/Retractable Features 3.3 Government of Canada Securities: T-Bills, Marketable Bonds & RRBs 3.4 Provincial & Municipal Debt and Strip Bonds 3.5 Corporate Bonds, Credit Spreads & Bond Ratings 3.6 Money Market Instruments, Floating-Rate Notes & International Bonds 3.7 Other Fixed-Income Securities & Reading Bond Quotes
5 Chapter 4: Pricing and Trading of Fixed-Income Securities
4.1 Bond Pricing, Price–Yield Relationships & Accrued Interest 4.2 Yield Calculations & Return Measures 4.3 The Term Structure of Interest Rates & Yield Curve Theories 4.4 Fundamental Bond Pricing Properties: Volatility Rules, Duration & Convexity 4.5 Bond Market Trading & Bond Indexes
6 Chapter 5: Common and Preferred Shares
5.1 Common Shares: Ownership Rights, Voting & Restricted Shares 5.2 Dividends, DRIPs, Stock Splits & Consolidations 5.3 Preferred Shares: Features, Cumulative Dividends & Taxation 5.4 Preferred Share Variations: Convertible, Callable, Retractable, Floating & Rate-Reset 5.5 Fundamental Equity Metrics & Ratios 5.6 Stock Indexes & Averages
7 Chapter 6: Equity Transactions
6.1 Order Types, Execution & Market Mechanics 6.2 Margin Trading: Long Accounts & Borrowing 6.3 Short Selling & Short-Margin Requirements 6.4 Trading & Settlement Procedures: T+1, CDS & Confirmations
8 Chapter 7: Derivatives
7.1 Derivatives: Role, Underlying Assets & Users 7.2 Options Fundamentals: Calls, Puts & Moneyness 7.3 Option Strategies & Risk Management 7.4 Forward & Futures Contracts 7.5 Rights & Warrants
9 Chapter 8: Corporations and their Financial Statements
8.1 Corporate Structures & Corporate Governance 8.2 The Annual Report, Accounting Standards & the Auditor's Report 8.3 The Balance Sheet & Income Statement 8.4 The Cash Flow Statement & Earnings Quality 8.5 Public Company Disclosure, Investor Rights, Take-Over Bids & Insider Trading
10 Chapter 9: Financing and Listing Securities
9.1 Government & Corporate Financing: Underwriting and Syndicates 9.2 The Prospectus Process, Stabilization & Purchaser Rights 9.3 The Exempt Market & Private Placements 9.4 The Listing Process: TSX, TSXV & Capital Pool Companies 9.5 Continuous Disclosure, Material Changes & Insider Reporting
11 Chapter 10: Investment Analysis
10.1 Methods of Equity Analysis & Macroeconomic Analysis 10.2 Fundamental Industry Analysis 10.3 Company Analysis: Competitive Advantages, Governance & the Dividend Discount Model 10.4 Discounted Cash Flow & Relative Valuation Multiples 10.5 Financial Statement Ratio Analysis 10.6 Assessing Preferred Share Investment Quality 10.7 Technical Analysis: Charts, Trends & Patterns 10.8 Technical Indicators, Volume, Breadth & Sentiment
12 Chapter 11: Portfolio Analysis
11.1 Measuring Investment Return 11.2 Measuring Risk: Types of Risk, Standard Deviation & Downside Measures 11.3 Portfolio Risk & Return: Correlation and Diversification 11.4 Beta, the Capital Asset Pricing Model & the Security Market Line 11.5 Portfolio Manager Styles: Equity & Fixed Income 11.6 The Portfolio Management Process: Objectives, Constraints & the IPS 11.7 Asset Mix, Monitoring, Performance Evaluation & Rebalancing
13 Chapter 12: Alternative Investments, Other Managed, and Structured Products
12.1 Alternative Investments: Structures, Fees & Liquid Alternatives 12.2 Alternative Strategies, Performance Measurement & Due Diligence 12.3 Segregated Funds, Labour-Sponsored Funds & Listed Private Equity 12.4 Income Trusts, REITs & Closed-End Funds 12.5 Structured Products: PPNs & Market-Linked GICs 12.6 Split Shares & Asset-Backed Securities
14 Chapter 13: Mutual Funds
13.1 Managed Products & Mutual Fund Structure 13.2 Pricing Mutual Fund Units: NAVPS & Forward Pricing 13.3 Mutual Fund Fees, Sales Charges & Unit Series 13.4 Mutual Fund Regulation, Fund Facts & Account Opening 13.5 Types of Mutual Funds & Fund Management Styles 13.6 Redemptions, Withdrawal Plans & Measuring Fund Performance
15 Chapter 14: Exchange-Traded Funds (ETFs)
14.1 ETF Origins, Structure, Tax Efficiency & ETF Facts 14.2 ETF Creation, Redemption & Arbitrage 14.3 Types of ETFs & Advanced Strategies 14.4 Comparing ETFs, Mutual Funds & Individual Securities
16 Chapter 15: Working with the Institutional Client
15.1 The Institutional Marketplace & Institutional Clients 15.2 Institutional Investment Guidelines, Styles & Restrictions 15.3 Buy Side & Sell Side: Trading Desks, Revenue, Clearing & Best Execution 15.4 Block Trading, Dark Pools & Algorithmic Trading
17 Chapter 16: Fee-Based Accounts and Working with the Retail Client
16.1 Fee-Based Accounts: Managed & Non-Managed Models 16.2 Fee Transparency, CRM2 & Total Cost Reporting, and MWRR vs. TWRR 16.3 The Financial Planning Approach & the Life Cycle 16.4 Behavioral Finance, Sequence-of-Returns Risk & Client Coaching 16.5 Estate Planning Basics
18 Chapter 17: Canadian Taxation
17.1 The Canadian Taxation System 17.2 Taxation of Investment Income 17.3 Capital Gains, Losses & The Superficial Loss Rule 17.4 Registered vs Non-Registered Tax-Advantaged Accounts 17.5 Tax Planning Strategies, Pension Plans & the RDSP
1.4 Investment Capital, Financial Instruments & Financial Markets
Key Takeaways Explain This Topic AI
Investment capital comes from the savings of households, businesses, governments with surpluses and foreign investors, and it flows to where risk-adjusted returns are most attractive.
Debt holders are creditors with a fixed claim; common shareholders are owners with a residual claim.
Issuers receive money only in the primary market; secondary-market trades move existing securities between investors.
Auction (exchange) markets match public orders by price-time priority, while dealer (over-the-counter) markets trade against dealers' quotes.
Almost all Canadian bonds trade over the counter, while listed equities, ETFs and options trade on exchanges.
Last updated: October 2026
Investment Capital: What It Is and Where It Comes From
Investment capital is money that is available to be invested in productive assets. It comes from savings : income that households, businesses and governments do not spend. Households save through bank deposits, pensions, RRSPs and TFSAs; businesses retain part of their earnings; governments that run surpluses add to the pool; and foreign investors supply capital when they buy Canadian securities.
The users of capital are governments (for infrastructure and deficits), businesses (for plants, technology and working capital) and individuals (mainly for mortgages). Capital is mobile: it flows toward places where the expected return is attractive for the risk and where taxes, regulation and political stability are favourable. Canada has long relied on foreign capital, so Canadian issuers compete with issuers around the world for investors' money.
The Financial Instruments
Financial instruments are the contracts that move capital from suppliers to users. They fall into a few broad groups:
Debt instruments (money market securities, bonds and debentures): the issuer borrows and promises interest and repayment. Holders are creditors with a fixed claim.
Equity instruments (common and preferred shares): investors buy ownership. Common shareholders have a residual claim on earnings and assets.
Investment funds (mutual funds, ETFs and other managed products): investors buy a share of a professionally managed pool.
Derivatives (options, forwards, futures, rights and warrants): contracts whose value is based on an underlying asset.
The Financial Markets
Instruments are created and traded in financial markets. The two most important distinctions are between primary and secondary markets, and between auction and dealer markets.
Primary vs. Secondary Markets
Financial markets are divided into two fundamental sectors based on whether securities are being distributed for the first time or traded among existing holders: the primary market and the secondary market.
The Primary Market
The primary market is the origin of capital formation. In this market, corporations, federal and provincial governments, and municipalities issue new debt and equity securities to secure new financial capital.
Proceeds Flow to Issuer : The primary market is the only venue where the issuing entity receives net cash proceeds from the sale of securities (less underwriting commissions and legal fees).
Types of Offerings :
Initial Public Offering (IPO) : A private corporation offers equity securities to the public for the first time, transitioning into a publicly traded reporting issuer.
Follow-on / Additional Offering : An established public corporation issues additional shares from treasury to fund expansion, repay debt, or finance acquisitions.
Rights Offering : An offering allowing existing common shareholders the contractual right to purchase new shares at a discount directly from the corporation, preserving their proportional ownership.
Private Placement : Securities sold directly to institutional or accredited investors without a full public prospectus, relying on statutory prospectus exemptions.
The Secondary Market
The secondary market is the venue where previously issued securities are transferred between buyers and sellers.
No Direct Corporate Capital : The original issuing corporation does not participate in secondary market transactions and receives no financial proceeds when shares trade.
Economic Significance : While issuers do not receive capital directly from secondary trading, healthy secondary markets are essential to primary issuance. Investors would refuse to buy new issues in the primary market without the guarantee of an active, liquid secondary market providing continuous price discovery and immediate liquidity.
Cost of Capital Impact : Secondary market prices reflect investor consensus regarding corporate performance, directly impacting the cost at which the company can raise future primary capital.
Auction Markets vs. Dealer (Over-the-Counter) Markets
Secondary markets in Canada operate under two distinct structural models: order-driven auction markets and quote-driven dealer markets. AUCTION MARKET (Order-Driven, e.g., TSX):
- [Buyer A: Bid \$25.10] ──┐
- [Buyer B: Bid \$25.08] ──┼──> [Central Limit Order Book] <──┼── [Seller X: Ask \$25.11]
- [Buyer C: Bid \$25.05] ──┘ (Price-Time Priority Matching) └── [Seller Y: Ask \$25.12]
DEALER / OTC MARKET (Quote-Driven, e.g., Fixed Income):
- [Investor] <────────> [Dealer Principal Inventory] <────────> [Investor]
- (Quotes Bid: \$99.50 / Ask: \$99.80)
- Auction Markets (Order-Driven)
In an auction market, buy orders and sell orders from public investors converge in a centralized order book. The prices at which trades execute are established through direct competition between buyers and sellers.
Central Limit Order Book (CLOB) : Bids (orders to buy) and offers or asks (orders to sell) are ranked electronically according to strict price-time priority :
Price Priority : The highest bid price and the lowest ask price execute before all other orders.
Time Priority : When two or more orders enter the book at the identical price, the order submitted earliest receives execution priority.
Designated Market Makers (DMMs) : On Canadian equity exchanges, specific dealers are assigned designated market maker responsibilities for specific stocks. The DMM is contractually obligated to maintain a fair, liquid, and orderly market by posting two-sided continuous quotes within defined maximum spreads and contributing capital to absorb temporary order imbalances.
Dealer Markets (Quote-Driven / Over-the-Counter)
Dealer markets (over-the-counter or OTC markets) are decentralized electronic networks where participants trade directly with investment dealers acting as principals from their own inventory.
No Central Auction Book : Instead of public orders crossing against each other, investors buy directly from a dealer at the dealer's ask price and sell to a dealer at the dealer's bid price.
Bid-Ask Spread : The dealer earns compensation through the spread (the difference between the price at which the dealer buys into inventory and sells out of inventory), assuming price risk while securities are held.
Fixed-Income Dominance : Nearly all Canadian debt securities—including Government of Canada bonds, provincial debentures, municipal bonds, and corporate debt—trade in the over-the-counter dealer market. Corporate bonds are too heterogeneous (varying coupons, maturities, covenants, credit ratings) to trade efficiently on continuous equity auction books.
- Feature Auction Markets Dealer (OTC) Markets
- Market Structure Order-driven; centralized limit order book Quote-driven; decentralized dealer network
Intermediary Capacity Dealers act primarily as agents matching orders Dealers act as principals trading for their own accounts
Price Formation Direct auction competition between public orders Dealers quote two-sided bid and ask prices
Dominant Assets Common equities, preferred shares, ETFs, options Federal/provincial/corporate bonds, money market, OTC swaps
Transparency High pre-trade and post-trade transparency (lit book) Moderate post-trade reporting; opaque pre-trade quotes
Primary Canadian Venues TSX, TSX Venture, CSE, Montreal Exchange Institutional dealer trading desks, inter-dealer brokers (IDBs)