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Bus101 CHAPTER 18 THE FINANCIAL SERVICES INDUSTRY IN CANADA Bus101 LEARNING OBJECTIVES 1. 2. 3. 4. 5. 6. The importance of the financial services industry in Canada. Money – what it is and how its value is determined. The role that banks play in providing services. The nature and impact of insurance. Five key criteria when selecting investment options. The opportunities in mutual funds as investments and the benefits of diversifying. Bus101 THE FINANCIAL SERVICES INDUSTRY IN CANADA Financial services provide: Money Banking Investing Insurance Financing Financial planning Bus101 FACTS ABOUT THE INDUSTRY In Canada, the financial services sector: Employs 600,000 + Provides a yearly payroll of over $35 billion Represents 6% of Canada’s GDP Yields more than $13 billion in tax revenue Is widely recognized as one of the safest and healthiest sectors in the world. Bus101 PARTICIPANTS IN THE FINANCIAL SERVICES INDUSTRY Banks Credit Unions Trust company Non-banks Pension funds Investment Agents Bus101 BANKS AND CREDIT UNIONS Commercial Banks Profit-seeking organization that receive deposits from individuals and corporations in the form of chequing and savings accounts and then uses some of these funds to make loans. Credit unions Non-profit, member-owned financial co-operatives that offer a full variety of banking services to their members. Bus101 CANADA’S SIX LARGEST BANKS Bus101 SERVICES OFFERED BY BANKS AND CU’S Some services provided are: Chequing and savings accounts Loans, mortgages Credit cards Overdraft protection, lines of credit Automated teller machines (ATMs) Life insurance brokerage services Financial counseling Telephone and Internet payment options Safety deposit boxes Registered retirement accounts Travelers' cheques Bus101 OTHER PARTICIPANTS IN FINANCIAL SERVICES Trust company: A financial institution that can administer estates, pension plans, and agency contracts, in addition to other activities conducted by banks. Non-banks: Financial organizations that accept no deposits but offer many services provided by regular banks. Pension funds: Amounts of money put aside by corporations, non-profit organizations, or unions to cover part of the financial needs of their members when they retire. Bus101 INVESTMENT AGENTS Underwriters Distribute new stock and bond issues Brokers Facilitate secondary trading of stocks and bonds, both on stock exchanges and on over the counter sock and bond markets. Bus101 HOW THE FINANCIAL SERVICES INDUSTRY IS REGULATED No single body that regulates FSI in Canada. May be regulated federally or provincially. Federally there are 3 agencies: 1. 2. 3. The Office of the Superintendent of Financial Institutions The Canada Deposit Insurance Corporation The Financial Consumer Agency of Canada Bus101 MONEY Economic growth and the creation of jobs depend on money. Money: Anything that people generally accept as payment for goods and services. Barter: The trading of goods and services for other goods and services directly. Coins and paper money Electronic cash Bus101 WHAT IS THE MONEY SUPPLY? Money supply: The amount of money the Bank of Canada makes available for people to buy goods and services. Bus101 WHY DOES THE MONEY SUPPLY NEED TO BE CONTROLLED? If there was twice as much money, and the same amount of goods and services, prices would go up because: more people would try to buy goods and services with their money. They would bid the price up to get what they wanted. The money supply needs to be controlled so we can somewhat manage the prices of goods and services. Also affects employment and economic growth/decline Bus101 THE GLOBAL EXCHANGE OF MONEY A falling dollar value means the amount of goods and services you can buy with a dollar decreases. What makes the dollar weak or strong is the position of the Canadian economy relative to other economies. The value of the dollar depends on a strong economy, so control over the money supply is very important. Bus101 CONTROL OF THE MONEY SUPPLY The Bank of Canada monitors the money supply. The objective of the Bank of Canada’s monetary policy is to support a level of spending by Canadians that is consistent with the Bank’s goal of price stability. Prime rate: The interest rate that banks charge their most creditworthy customers. Bus101 WORLDWIDE BANK RATINGS, 2008 Bus101 THE INSURANCE INDUSTRY Provides insurance protection for most buildings, vehicles, and commercial enterprises through-out Canada. Insurance shares risk with others through the payment of insurance premiums. These premiums are used by insurance companies to pay for client damages in the event of a major catastrophe. Bus101 THE CANADIAN SECURITIES INDUSTRY Securities dealer: A firm that trades securities for its clients and offers investment services. Prospectus: A condensed version of economic and financial information that a company must make available to investors before they purchase a security. Securities commission: A government agency that administers provincial securities legislation. Stock exchange: An organization whose members can buy and sell (exchange) securities for companies and investors. Bus101 HOW TO INVEST IN SECURITIES Stockbroker: A registered representative who works as a market intermediary to buy and sell securities for clients. A broker can be a valuable source of information about what stocks or bonds would best meet your financial objectives. Investors can also use online trading to buy and sell stocks. Bus101 INVESTING IN BONDS Government bonds are a secure investment for people who desire low risk and guaranteed income. These bonds have full financial backing and credit of the government. Corporate bonds are more risky and challenging, however they may produce You may be able to sell your bond at either a discount or a premium, if you decide to sell your bond before its maturity date. Bus101 INVESTING IN STOCKS Buying stock makes the investor an owner of the firm. Capital gains: The positive difference between the purchase price of a stock and its sale price. Stock indexes: Measure the trend of different stock exchanges. Buying on margin: Purchasing securities by borrowing some of the cost from the broker. Stock split: An action by a company that gives shareholders two or more shares of stock for each one they own. Bus101 INVESTING IN MUTUAL FUNDS Mutual fund: A fund that buys stocks and bonds and then sells units of ownership in the fund to the public. Diversification: Buying several different investment alternatives to spread the risk of investing. Investors can buy shares of the mutual funds and share ownership of many different companies they may not have been able to afford individually. Bus101 COMPARING INVESTMENTS