Financial Markets in Canada: What are the Financial Markets?

2.3 What are the Financial Markets?

Picture this scenario: You’re chatting with a friend who’s really excited about a new technology company going public on the Toronto Stock Exchange (TSX). She tells you she’s itching to buy shares the day they start trading. She’s thrilled about “getting in early,” but you’re wondering how exactly these shares get from the company to your friend’s investment account, and then how she might later trade them with another investor. Financial markets are the pathways that make it all possible.

Below, we’ll break down what the financial markets are all about, focusing on Canada. We’ll explore how they operate, why they’re important, how they facilitate the buying and selling of everything from stocks to bonds and beyond, and how understanding them can help you guide clients more effectively in the world of mutual funds.

Why Do We Even Need Financial Markets?

At their core, financial markets connect people or organizations that have surplus capital (like households saving for retirement) with those that need capital (like companies wanting to expand or governments financing new infrastructure). These “markets” link those who want to invest with those who need investment. In Canada, this includes everything from large-scale pension funds and corporations to the everyday investor putting money into a Registered Retirement Savings Plan (RRSP).

If you think about it, without these markets, companies would have a harder time getting the money they need to grow, and investors wouldn’t have an easy way to put their money to work in promising ventures. Let’s start with the two big categories of markets you’ll hear about: the primary market and the secondary market.

The Primary Market

When you hear about an “IPO” (or Initial Public Offering), that is typically happening in the primary market. This is where new securities are created and sold to the public for the very first time. The issuer—whether it’s a government, corporation, or another entity—receives the proceeds directly from the sale.

Let’s say Company XYZ decides to go public on the TSX. First, they work with underwriters (often big investment banks) to determine how many shares to sell, at what price, and to strategize the entire launch. When the IPO day arrives and you buy those newly issued shares, your money goes to Company XYZ, helping them fund operations, expansion, or perhaps the development of their next big product.

These newly issued securities aren’t just stocks. A brand-new corporate bond issuance is also part of the primary market—the corporation sells those bonds to investors, and the funds raised go directly to the corporation. Governments also use this mechanism by issuing Treasury bills and bonds to finance public projects.

The primary market, then, is all about the initial flow of money from investors to issuers. IPOs can feel exciting because they represent a “newcomer” entering the investment space. But it’s not all glitz and glamour: investing in something brand-new carries its own risks, including price volatility and the challenge of placing an accurate value on a never-before-traded security.

The Secondary Market

Once the shares of Company XYZ (or any other security) have been issued, they don’t just stop trading. Instead, those IPO shares often move onto stock exchanges like the TSX or TSX Venture Exchange (TSXV). This is known as the secondary market. Here, investors buy and sell existing securities among themselves.

Think of the secondary market as a used-car lot for shares, bonds, and other securities—though hopefully a more transparent and efficient one! The price of these securities is no longer set by Company XYZ. Instead, it’s influenced by investor demand, economic indicators, corporate performance, and the occasional rumor or news story that can push investors to act quickly.

The secondary market serves a vital purpose: it gives you the chance to sell your shares whenever you want (as long as there’s a willing buyer). This liquidity—the ability to buy or sell quickly at a predictable price—is what makes the secondary market so attractive. Without a healthy secondary market, fewer people would be willing to invest in the primary market because they’d be stuck holding their securities indefinitely.

Below is a simple diagram illustrating how the primary market flows into the secondary market:

    flowchart LR
	    A["Issuer <br/>(Company/Government)"] --> B["Underwriter <br/>(Investment Bank)"]
	    B["Underwriter <br/>(Investment Bank)"] --> C["Investors <br/>(Primary Market)"]
	    C["Investors <br/>(Primary Market)"] --> D["Secondary Market <br/>(Exchanges, OTC, etc.)"]
	    D["Secondary Market <br/>(Exchanges, OTC, etc.)"] --> E["Buyers & Sellers <br/>Trade Existing Securities"]

From the diagram:
• The issuer (e.g., Company XYZ or a government) issues securities, collaborating with an underwriter.
• Investors purchase those new securities in the primary market, with proceeds going to the issuer.
• The securities then find a home in the secondary market, trading among investors on exchanges or over-the-counter (OTC) markets.

Spotlight on Canadian Stock Exchanges

Canada has two major stock exchanges under the TMX Group banner:

• The Toronto Stock Exchange (TSX): Considered Canada’s premier exchange for senior issuers, including large, well-capitalized companies across various industries—finance, mining, energy, tech, and more.
• The TSX Venture Exchange (TSXV): A marketplace that caters mainly to emerging companies. It’s a stage where smaller ventures can gain access to the public market, raise capital, and eventually graduate to the TSX once they meet additional listing requirements.

Both the TSX and TSXV play a huge role in the Canadian financial landscape. The TSX is known for its liquidity, prestige, and larger-cap stocks, whereas the TSXV is often seen as a proving ground for growth-oriented or early-stage companies. Understanding the differences can help you better gauge the risk and liquidity profiles for specific securities—you might see an up-and-coming mining exploration company on the TSXV, whereas you’d interact with an established financial giant on the TSX.

For more information on listings, trading data, and other important disclosures, visit the TMX Group’s official website:
• TMX Group (TSX & TSXV)

The Role of Liquidity

Have you ever tried to sell a used car and found the process exhausting because there just weren’t enough interested buyers? That’s what it can feel like when you hold shares (or bonds) of a company that trades on very low volume—sometimes called thinly traded securities.

Liquidity refers to how quickly and easily you can convert an asset to cash without significantly affecting its market price. On heavily traded exchanges like the TSX, if you place a market order to sell 1,000 shares of a blue-chip stock, chances are there are enough buyers that your order is executed quickly and at a price close to the last traded price. However, if you hold shares of a small, thinly traded stock listed on the TSXV, you might have trouble finding a buyer at the price you want, which could cause you to lower your asking price just to find someone willing to purchase.

In short, high liquidity reduces transaction costs and promotes market stability. Thin or illiquid markets, on the other hand, can be riskier. Investors might face higher volatility and bigger losses on forced sales.

Market Efficiency and Transparency

If the financial markets are well-regulated, widely reported on, and utilize modern trading systems, buyers and sellers will have a better chance of getting fair prices. Market transparency is key: it helps investors see real-time quotes and recent transaction prices so they can make informed decisions. Canada’s markets typically enjoy strong transparency, thanks in part to regulatory bodies like provincial regulators and the Canadian Investment Regulatory Organization (CIRO).

Transparency also extends to the information that companies must provide via financial statements, press releases, and guidance reports. If everyone has access to the same information (at least in principle), it’s less likely that a small group of insiders can unfairly profit at the expense of others.

Electronic Trading and Online Brokerages

Not too long ago, people who wanted to invest in stocks or bonds had to place buy and sell orders by calling a broker on the phone. That’s changed with the rise of electronic trading platforms and discount brokerages, which let you place trades with just a few taps or clicks. This proliferation of online access has done a few things:

• Lowered transaction fees.
• Widened the pool of market participants, including younger or smaller retail investors.
• Increased market liquidity through a higher volume of daily transactions.

But it also demands that investors remain vigilant—volatility can spike rapidly, especially when information flows so quickly online. In an age of social media rumors, prices can jump or dive before you’ve even had time to sip your morning coffee.

Market Volatility and Investor Sentiment

Sometimes, a piece of news or a major global event can send stock prices spiraling down or catapulting up. Think about how COVID-19 impacted markets worldwide in early 2020, or how certain geopolitical events might suddenly shake investor confidence. Markets thrive on information, and they can react almost instantly.

This phenomenon is often referred to as market volatility: the rate at which prices move up or down over a specific period. Some volatility is normal—markets reflect collective investor sentiment. But excessive volatility can signal a crisis of confidence or a mismatch between buyers and sellers, leading to big price swings.

From a mutual fund sales representative’s perspective (tying this back to Chapter 1’s emphasis on your advisory role), you want to stay aware of how volatile markets might affect a client’s risk tolerance or emotional comfort. A clear understanding of market volatility helps you give better guidance—maybe a nervous client needs more conservative holdings, or a seasoned investor might be comfortable buying during a dip.

Regulatory Framework and CIRO Oversight

Historically, Canada had two main self-regulatory organizations overseeing dealer and market conduct: the Mutual Fund Dealers Association (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC). As of January 1, 2023, these organizations amalgamated into the Canadian Investment Regulatory Organization (CIRO). Effective June 1, 2023, CIRO is now Canada’s single self-regulatory body overseeing investment dealers, mutual fund dealers, and market integrity on equity and debt marketplaces.

CIRO ensures that markets remain fair, users operate under ethical standards, and potential misconduct is surveilled or disciplined. CIRO does not operate in a vacuum, however. Provincial regulators—like the Ontario Securities Commission (OSC)—still have ultimate authority in their jurisdictions, especially concerning securities legislation. Meanwhile, the Canadian Investor Protection Fund (CIPF) now stands as the sole investor protection fund dedicated to protecting client assets if a member firm becomes insolvent.

You can find more details on the structure and role of CIRO here:
• CIRO Market Regulation
• Ontario Securities Commission

Practical Connections to Mutual Funds

Mutual funds themselves invest in a basket of securities, which frequently trade on the secondary market. For instance, a mutual fund might hold a range of TSX-listed stocks, some bonds, or even foreign securities. The underlying liquidity of these assets can impact how quickly the fund manager can adjust the fund’s portfolio or meet redemptions. Likewise, if the fund holds thinly traded stocks, there might be an elevated liquidity risk.

When you’re chatting with clients, you might highlight how mutual funds offer a convenient way to diversify risk across a portfolio of securities. But it’s also worth explaining how the value of their holdings hinges on prices in these underlying financial markets. If volatility hits the underlying stocks, the mutual fund’s net asset value (NAV) may experience sharper daily fluctuations than the client anticipates.

Global Influences on Canadian Markets

Canada’s financial markets aren’t isolated. Global economic forces, such as U.S. Federal Reserve decisions on interest rates or economic data from China (a major importer of Canadian natural resources), can ripple through the TSX almost instantly. The interconnectedness of global markets means that even if a client only invests in “Canadian” mutual funds, global trends can still drive performance.

For example, if a global wheat shortage pushes up commodity prices, you might see Canadian agricultural stocks rise. Conversely, a commodity slump might hurt Canadian resource sectors, pressuring the TSX. Understanding that interplay helps you explain performance to clients, giving them insights into why prices move even when they don’t see any obvious “Canadian” news story to explain it.

Common Pitfalls and Best Practices

You might occasionally hear from clients who think they can outsmart the market with insider tips, or who panic at the first sign of a downturn. Here are a few pitfalls to watch out for:

• Overreacting to short-term volatility.
• Relying on rumors or speculative news.
• Underestimating liquidity risk.
• Forgetting to diversify.

As an advisor, you can guide them to a more balanced perspective. Encourage a focus on longer-term strategies, diversification, and due diligence. For instance, if someone wants to chase a “hot stock,” remind them of the primary versus secondary market dynamics—by the time something is “hot,” it’s likely trading at a significant premium already, reflecting that hype.

A balanced approach may include a well-diversified mutual fund that invests in different sectors, asset classes, and geographies. This strategy mitigates some of the risks that arise from focusing too narrowly on a single sector or region.

A Quick Personal Anecdote to Bring It Home

I once had a colleague who was super excited about a new IPO on the TSX Venture Exchange. She invested a tidy sum on the very first day. She couldn’t stop talking about how this company was going to be “the next big thing.” But by the second week, the share price had dropped significantly—supply outnumbered demand, and investors were nervous about shaky financials. She painfully realized that new listings can be unpredictable, and thin trading on the TSXV can magnify volatility.

Of course, that doesn’t mean this particular IPO is doomed forever. Many companies cut their teeth on the TSXV and eventually find growth success, sometimes “graduating” to senior exchanges. But it underlines an important lesson for all of us: understanding liquidity, volatility, and the nuances of stock exchanges is crucial before making big investment decisions.

Additional Resources

If you’re curious to dig deeper, here are some resources that can help:

• TMX Group (TSX & TSXV) – Real-time quotes, market data, listing requirements.
• CIRO Market Regulation – Learn about Canada’s integrated self-regulatory organization.
• Ontario Securities Commission – Gain insights into one of Canada’s main provincial regulators.
• “Trading and Exchanges: Market Microstructure for Practitioners” by Larry Harris – A foundational text for understanding how trading mechanisms and order flow affect prices.

Wrapping Up

Financial markets are where capital is raised, and wealth is built, transferred, and sometimes lost. For mutual fund professionals and everyday investors alike, understanding the difference between the primary and secondary markets, the concepts of liquidity and volatility, and the role of regulation is fundamental. This knowledge can help you make more informed decisions, set realistic client expectations, and effectively advise on products such as mutual funds, which rely heavily on well-functioning financial markets.

You don’t need a PhD to grasp these essentials—just a willingness to learn and a commitment to continuous improvement. The next time your friend brags about an IPO or big stock tip, you’ll know how to bring a bit of clarity to the conversation, explaining exactly where and how these securities are traded and the risks involved.

Remember, the Canadian financial marketplace is vast, with many moving parts. But once you’ve got a handle on the primary and secondary market distinction, liquidity, and the regulatory framework, you’re off to a solid start. As you continue through the rest of this course, you’ll see how these market fundamentals tie into broader financial planning, economic forecasting, and ethical decision-making.

Test Your Knowledge: Financial Markets in Canada Quiz