Canadian Securities Course Volume 1 Prepared and published by CSI 200 Wellington Street West, 15th Floor Toronto, Ontario M5V 3C7 Telephone: 416.364.9130 Toll-free: 1.866.866.2601 Fax: 416.359.0486 Toll-free fax: 1.866.866.2660 www.csi.ca Credentials that matter. Copies of this publication are for the personal use of Notices Regarding This Publication: properly registered students whose names are entered This publication is strictly intended for information and on the course records of CSI Global Education Inc. educational use. Although this publication is designed to (CSI)®. This publication may not be lent, borrowed provide accurate and authoritative information, it is to be or resold. Names of individual securities mentioned used with the understanding that CSI is not engaged in in this publication are for the purposes of comparison the rendering of fi nancial, accounting or other professional and illustration only and prices for those securities were advice. 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ISBN: 978-1-927104-73-6 First printing: 1964 Revised and reprinted: 1967, 1968, 1969, 1970, 1971, 1973, 1974, 1976, 1977, 1978, 1979, 1980, 1981, 1983, 1984, 1985, 1986, 1987, 1988, 1989, 1990, 1991, 1992, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2010, 2011, 2013 Copyright © 2013 by CSI Global Education Inc. Course Introduction Welcome to the Canadian Securities Course (CSC)! In beginning this course, you are taking an important fi rst step toward a comprehensive fi nancial education. You will be able to apply the knowledge you acquire in this course to an exciting career in the fi nancial services industry, or you can use it simply to make informed fi nancial decisions and maximize your investment potential. The CSC is recognized as an industry benchmark. It covers a diverse range of topics, including fi nancial markets, fi nancial instruments, and fi nancial intermediaries. The course content refl ects the ever-changing nature of the securities industry. Ten years ago, for example, exchange-traded funds, principal protected notes, and hedge funds were barely covered in the CSC, because they were of little signifi cance. Today, these types of securities are treated in-depth in the CSC, because they have come to play a vital role in the fi nancial landscape. The dynamic nature of the industry is a compelling reason to take the CSC course, whether you aspire to a career, are already working in the fi nancial services industry or merely want to enhance your investing knowledge. Your challenge is to thoroughly understand the material so you can apply it in the workplace, discuss key concepts with your fi nancial advisor, or use your knowledge to make your own investment decisions. Our challenge is to make the content easy to learn. We created various course components for this purpose, and we highly recommend that you use them all. They include the textbook, online learning activities, post-test questions, discussion boards, Frequently Asked Questions (FAQs), and the CSC Check product. © CSI GLOBAL EDUCATION INC. (2013) i COURSE INTRODUCTION iii Tell Us How We’re Doing! Although we make every effort to ensure that what you are learning is accurate, practical, and well written, we recognize that there is always room for improvement. The course is updated regularly, so please let us know what you think. You can submit comments, suggestions or complaints to [email protected]. This edition of the Canadian Securities Course (CSC) textbook was prepared in the Fall of 2012. The CSC textbook is updated and revised regularly to better reflect the rapidly changing financial services industry. We thank those students and industry representatives who helped with the revision process, either through their suggestions or by providing or verifying information for the book. What You’ll Learn The CSC covers the three central elements of the Canadian securities industry—financial products, financial markets, and the role of financial intermediaries. Intermediaries include Investment Advisors, financial planners, and financial advisors, among others. Our goal is to help you understand the marketplace and introduce you to industry terminology and practices. Our journey begins with an introduction to the Canadian securities industry, the regulatory landscape and the economy. From there, we move to the different types of markets, instruments and methods of analysis. The course ends with a look at the many types of structured or financially engineered products, taxation, ethics and, finally, the financial planning process. Volume 1 provides the tools and knowledge that you will need to apply to the material in Volume 2. What Is the Big Picture? Think of the capital market as the engine of the economy. By this we mean that the capital market transforms savings into investments, and these investments drive a nation’s growth. This vital economic function is based on a simple process—the transfer of money from those who have it (savers) to those who need it (users). Capital transfer at its simplest occurs when you deposit money into a bank account. Once you make a deposit, the bank can lend it to a business that needs funds. For example, the business may use borrowed funds to expand their operations or to become a publicly-traded company on a stock exchange. In return, the business pays interest on the borrowed funds, and you receive a portion of that interest for the use of your money. Of course, the capital transfer process is more sophisticated in our financial markets, especially as they become increasingly complex. In essence, the financial markets have evolved to work like this: • Financial instruments, such as stocks and bonds, formalize the transfer of capital. • Financial markets provide a forum where capital is transferred in the form of fi nancial instruments. • Financial intermediaries, such as Investment Advisors, make the transfer process faster and easier. © CSI GLOBAL EDUCATION INC. (2013) iv CANADIAN SECURITIES COURSE • VOLUME 1 These three components—instruments, markets, and intermediaries—are the key elements of the securities industry. In combination, they facilitate the efficient allocation of capital. For example, a company needs capital to expand its operations. The company raises capital by issuing financial instruments, such as stocks or bonds, into the market through an investment dealer. Investors buy the securities through an intermediary such as a financial advisor. In the process, the investors temporarily transfer their money to the company. In return, they receive securities representing claims on the company’s real assets. If the business does well, it earns a profit. Part of these earnings may be distributed to the investors in the form of dividends or interest, depending on the type of security that was purchased. The price of the security also may rise, yielding a profit or capital gain for the investor when the security is sold in the marketplace. Investors aren’t the only ones to profit, however. Part of the money earned by the company may be reinvested in the business, spurring further economic development. Consequently, securities investments benefit not only the investor and the user of capital, but also the country as a whole. Key Chapter Features Each chapter includes the following learning features: Chapter Outlines: The chapter outline lets you know what content will be covered in the chapter and will prepare you for the material you are about to read. Learning Objectives: The learning objectives help to focus your studies on important topic areas. Be sure to read each objective before you begin a chapter; the objectives specify precisely what you are expected to know after reading the chapter and studying the material. To highlight their importance, we have linked each objective directly to the chapter’s major headings. Chapter Openers: Each chapter begins with a short overview of the importance and relevance of the material to be covered. The openers set the stage and help to increase your motivation by linking the chapter content to the real world. Key Terms: Understanding the terminology and jargon of the securities industry is an important part of your success in this course.