Education Centre

Learning path for self-directed investors who want to know more about financial markets and investing

Capital markets

Capital markets are comprised of distinct markets within which investors trade securities. The three main markets are:

  • Stock market
  • Bond market
  • Money market

Each of these markets is then divided into two categories:

  • Primary market: Where companies and governments issue securities to investors for the first time.
  • Secondary market: Where investors trade securities among themselves, after they have been offered on the primary market. This market allows investors who have purchased a product on the primary market to sell it to other investors, depending on its current value.

Within each of these markets, there are several types of sub-markets, which are known as exchanges, namely:

Canadian exchanges

There are three main groups of Canadian exchanges:

  1. TMX Group – an organization made up of several Canadian markets, including:
    • TSX Venture Exchange, which is in charge of trading small-cap stocks and certain debentures.
    • NEX, a distinct entity of the TSX Venture Exchange. It provides a trading forum for listed companies that have fallen below TSX Venture's ongoing listing standards.
    • Toronto Stock Exchange, the main exchange for Canadian equities.
    • Montréal Exchange, responsible for trading financial derivatives, such as options and futures.
  2. The Canadian National Stock Exchange (CNSX) whose role is to provide a parallel market to that of the TSX Venture Exchange for start-ups.
  3. Alternative exchanges – created by Canada’s leading brokers and investors as a way to reduce costs. For instance, Alpha, Omega Pure, Chi-X and Triact.

U.S. exchanges

The New York Stock Exchange (NYSE) is the main exchange of the United States where equities, futures, options, fixed income securities and other financial products are traded.

The Nasdaq is the second most important U.S. exchange in terms of trade volume. After the NYSE, it is the largest electronic stock market in the world.

The American Stock Exchange (AMEX) is an exchange known for having more flexible rules than the others, which allows smaller companies to be traded, namely foreign companies, particularly Canadian.

The Chicago Board Options Exchange (CBOE) is the leading North American stock exchange. It is used to trade option contracts for certain U.S. market stocks, according to specific requirements.

There are other U.S. stock markets, of varying importance, including the Boston Options Exchange (BOX) and the Philadelphia Stock Exchange.

Over-the-counter (OTC) market

Inter-dealer markets (also known as OTC markets or unlisted markets) are made up of a network of dealers who trade among themselves via computer or telephone. This market is not regulated to the same extent as the others. Dealers may post bid and ask prices, but trades can be executed at different prices, to which the general public rarely has access. This market is targeted toward institutional investors who trade large volumes. Also, it carries more risk since there is no clearinghouse (such as the CDS Clearing and Depository Services Inc. or the Canadian Derivatives Clearing Corporation) supervising the proper execution of trades.

The OTC market does not impose listing conditions for the stocks it trades, and does not subject its companies to any regulation. As such, securities traded on this market are typically more speculative in nature and less liquid than their counterparts.

The image below illustrates the differences between exchange-traded securities and OTC securities.

Finally, within all these sub-markets are market indices, which measure the performance of a given exchange. These indices contain securities that meet specific criteria (for instance, the issuer’s market cap, liquidity or market value).

Variations within the index are provided in basis points. For instance, when we hear that the TSX has climbed by 100 basis points, it means that its market value has increased by 1%. It will therefore cost you 1% more than yesterday to purchase shares of this index… but you also could sell your shares of the index and make a 1% profit.

The table below provides examples of U.S. and Canadian market indices.

Index  Characteristics
S&P/TSX Composite Index
  • 10 sectors (e.g., energy, financial services)
  • More than 250 companies
S&P/TSX 60 Index
  • 60 largest companies in Canada with the most liquid stocks
S&P/TSX Venture Index
  • TSX Venture Exchange index
  • Approx. 500 securities
Dow Jones Index
  • 30 U.S. companies with the largest market caps (Blue Chips)
  • Value weighted
S&P 500 Index
  • 500 largest companies
  • Market-cap weighted
  • More representative than the Dow Jones
NASDAQ Index
  • More than 4,000 companies

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