Education Centre

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

Glossary

A

Above par (Premium)

Said of a security (generally a bond) that is sold above its nominal value. The bond is therefore said to be sold at a premium. Most securities that trade at a premium trade on the secondary market.

Accrued interest

Interest, not yet received, that has been accumulating since previous interest payment.

Administrator

Person responsible for the safekeeping and management of assets belonging to a third party. Depending on the situation, an administrator can be referred to as an estate executor (liquidator under the Civil Code of Quebec), a trustee in bankruptcy or a fiduciary.

Agent

A securities broker acts as an agent on behalf of a buyer or seller when the securities traded in a transaction are not held by him.

Alpha

Measure of the risk-adjusted performance of a security or portfolio in comparison to a benchmark.  A positive alpha would indicate that a security has outperformed the benchmark and a negative alpha would indicate an underperformance.

American-style option

An American-style option is a type of option that can be exercised anytime before or on the expiration date.

Annual report

Official report issued by a public corporation to its shareholders containing information about the corporation's financial position. The report must be audited by independent accountants.

Annuitant

Person who receives an annuity.

Annuity

A periodic payment from an invested lump sum of principal, retirement contributions or insurance premiums.

Ask price

The lowest price at which a seller is willing to sell a financial instrument listed on an exchange.

Asset

Anything of economic value owned by a corporation or an individual, including anything owed to that corporation or individual.

Asset allocation

Establishing or reviewing an investment portfolio's asset asset mix in order to optimize the risk/reward tradeoff.

Automatic withdrawal plan

Investment plan that authorizes automatic withdrawals from a bank account.

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B

Back-end load fund

Type of mutual fond that applies a sales charge upon redemption. The early redemption fee is often represented by a percentage of the value of the funds being sold and is charged only if there is a sale before the prescribed maturity date. The deferred sales charge is digressive; it decreases as the date of maturity approaches.

Balanced fund (diversified fund)

The objective of this mutual fund is to build a balanced portfolio made up of bonds, shares and money market instruments that reflects market conditions. The main objective of diversified portfolios is to provide investors income and capital appreciation while protecting against risk.

Balance of trade

Difference between the total value of a country's exports in goods and services and the total value of its imports in goods and services in a given period.

Balance sheet

A financial statement that shows a corporation's assets, liabilities and shareholders' equity on a specific date.

Bank rate

Rate at which the Bank of Canada makes short-term advances to chartered banks and other financial institutions. The prime rate set by financial institutions is based on the bank rate.

Banker's acceptance

Type of short-term commercial paper issued by a corporation and guaranteed by a bank. This guarantee translates into higher issue prices and therefore lower returns. Banker's acceptances are widely used in import/export transactions and constitute a source of corporate financing.

Basis point

Expression generally used to refer to differences in bond yields. One basis point is equal to 0.01% (1% is equal to 100 basis point).  Therefore, if bond X has a yield of 8.50% and bond Y's yield is 8.75%; the difference is 25 basis points.

Bear market

A bear market is characterised by a steady decrease in the equity markets and usually occurs when the economy is in a recession.

Below par (discount)

Said of a security (generally a bond) that is sold under its nominal value. For example, Treasury bills are always sold at a discount.

Beta (beta coefficient)

Measure of a fund's volatility (systematic risk) relative to the market. The beta takes into consideration the portfolio or security`s  standard deviation and correlation coefficient compared with its reference index. If a security has the same volatility as the index, it has a beta of 1. Similarly, if a security has a beta above 1, it is more volatile than the market. A beta below 1 indicates a lower volatility.

Bid price

The highest price that a prospective buyer is willing to pay for a financial instrument listed on an exchange.

Blue-chip Stock

Refers to shares of well-established companies with a solid financial record and stable growth.

Board of directors

Individuals elected to act on behalf of shareholders to manage the company. Members are usually elected on a yearly basis at the annual meetings.

Bond

Debt instrument issued by corporations, governments and government agencies. The bond issuer commits to paying interest for the duration of the bond on specific dates and to repaying the principal amount at maturity.

Bond fund

Mutual fund that invests primarily in government and corporate bonds.

Book value

The initial cost of an investment plus reinvested income. Book value is often used to calculate the foreign content portion of a registered plan.

Brokerage fee

Commission received by a broker who buys and sells securities on a client's behalf.

Bull market

A bull market is characterised by a prolonged period of increase in the equity markets and is usually associated with a period of economic recovery or expansion.

Business day

Any day when businesses are operating. Usually refers to Monday through Friday and excludes weekends and holidays.

Buying on margin

Financing the purchase of securities in part with money borrowed from the broker.

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C

Callable bond (redeemable bond)

Bond that the issuer may redeem prior to maturity at the price stipulated in the issuing contract.

Call option

A call option allows the investor to buy an underlying security at a pre-determined price (exercise price) during a prescribed period or specified date. An investor would purchase the call option if there is an expected increase in the price of the underlying security. In order to acquire the right to purchase the security at the exercise price, the buyer of the option pays a premium to the seller.

Canada Savings Bond (CSB)

Bonds that are issued every year by the Canadian government. They offer a minimum interest rate and can be redeemed at any point in time at par value. They can be cashed at any time at par value.

Canadian equity fund

The objective of this fund is to provide long-term capital appreciation by investing mainly in common shares of Canadian corporations.

Capital (in economics)

In economics, capital represents machinery, factories and inventories required to manufacture products.  In finance, capital refers to money or other financial assets used to carry out business transactions. For an investor, capital is the total amount invested in securities and other assets, plus cash.

Capital gain

A capital gain occurs when the market value of an asset exceeds it's initial purchase price. A capital gain is only realized when the security is sold.

Capital loss

A capital loss occurs when the market value of an asset is below it's initial purchase price. A capital loss is only incurred when the security is sold.

Capital markets

Market consisting of persons, organizations and financial institutions where capital funds are traded.  Capital markets consist of both primary and secondary markets.

Capital stock (market capitalization is the most commonly used term)

The total number of preferred and common stock representing ownership in a corporation.

Cash and cash equivalents

Assets that are readily convertible to cash, such as accounts receivable, short-term commercial paper and short-term bonds and notes issued by municipalities and corporations.

Cash surrender value

Amount an insured can receive upon voluntary cancellation of a life insurance policy.

Central bank

Agency created by the government of a country in order to regulate its currency and monetary policy at the national and international level. In Canada, the central banking system is known as the Bank of Canada and in the U.S. it is known as the Federal Reserve Board.

Certificate

A document issued to the purchaser of a stock, bond or other security as proof of ownership.

Certificate of deposit

Fixed-income debt instrument issued by most chartered banks, generally in minimum denominations of $1,000, for terms ranging from one to six years.

Closed-end fund

A closed-end fund is a fund with a set number of units available for sale. Unlike typical mutual funds, a closed-end fund trades on an exchange and its unit price fluctuates based on market demand in the same way a stock price does.

Commercial paper

Short-term debt instrument (ranging from a few days to one year) issued by a corporation. Commercial paper is generally not secured by the corporation's assets.

Common share

Unit of participation or ownership in a corporation that also carries a right to vote and entitles the investor to share in the company's success through dividends and capital appreciation. In the event of liquidation, common shareholders are the last to have right to the company's assets. They are compensated only after debt holders and preferred shareholders have been paid in full.

Compound interest

Interest earned periodically that is added to the borrowed principal. The interest is calculated both on the borrowed principal and on the accumulated interest. In other words, compound interest is interest paid on interest.

Consumer price index (CPI)

Measure of change in the cost of living for consumers. The CPI highlights price increases (inflation).

Covered call

An option strategy whereby an investor holds a position in the underlying asset (long) and simultaneously sells (writes) call options on that same asset. Investors who employ this strategy stipulate that the price of the underlying will either remain relatively stable or decrease thus making income on the premium generated from the sale of the option.

Convertible

Said of a bond, debenture or preferred share that is usually exchangeable for one or more common shares of the same corporation.

Corporation

Type of company, created under federal or provincial legislation, which is legally separate and distinct from its shareholders. A corporation is characterized by limited liability. Shareholders of a corporation have the right to participate in the profits but are not held liable for the company's debt.

Correlation coefficient

Measures the interdependence between two random variables.  The measure is often used to determine if mutual fund returns vary based on market conditions or on other fund categories. Portfolio diversification is enhanced where funds are not highly correlated.

Coupon

Term that refers to the interest payments made to bondholders. Coupons are typically paid semi-annually.

Coupon bond (zero coupon bond)

A high-quality bond, generally issued by a government, with detachable coupons. Detached coupons and coupon bonds are therefore traded separately at a deep discount from their face value.

Credit rating

Evaluation of an individual's or a corporation's credit history and capability of repaying obligations.

Cumulative preferred share

It refers to a preferred stock with a provision that if one or more dividend payments have not been made, the unpaid dividend amounts accrue and are paid out before any dividend is given to common shareholders.

Current asset

Cash and other assets that can be converted into cash in the normal course of business, usually within a year. Current assets also fund the day-to-day operations of a company.

Current liability

Sum of all the company's debts that are due within one year such as accounts payable.

Current yield

Annual return an investor will receive from a security bought at market price. It is equal to annual income from an investment divided by the market price. Sometimes called return on investment (ROI).

Custodian

Financial institution, generally a bank or trust company, which keeps custody of an investment company's securities and cash.

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D

Debenture

Debt instrument issued by corporations, municipalities or governments. A debenture is a promise to pay interest and repay the principal and is not secured by one or more of the issuer's assets. It is secured only by the issuer's credit standing.

Debt

Amount of money that must be repaid with interest. Corporate debt often includes bonds and other debt instruments.

Debt-equity ratio

It is a measure of the company's leverage and shows us how aggressive a company has been in financing it's growth with debt. It is calculated by dividing the company's total liabilities by the shareholder's equity. A higher ratio could more risk for a company during times of increased interest rates.

Debt security

Security representing an investor's loan to an issuer who commits to repaying the principal plus interest. Debt securities may include debt instruments, debentures, Treasury bills and commercial paper.

Declaration date

It is the date when a company announces it's next dividend payment.

Deferred annuity

Contract generally sold by a life insurance company that provides the beneficiary or annuitant with regular payments as of a future agreed-upon date. The contract is generally bought through a series of payments over a given period. The period ends before the annuity payment begins.

Deferred Profit-Sharing Plan (DPSP)

A profit-sharing plan under which an employer sets aside a portion of profits for the benefit of employees based on the company's net earnings.

Deflation

Sustained decline in the average level of prices throughout the economy.   Deflation can be caused by direct contraction in spending or by a reduction of the supply of money or credit.

Defined benefit pension plan

Defined benefit pension plan guarantees a specified level of retirement income to each participant, based on the participant's salary and number of years of service.

Defined contribution pension plan

An employer-sponsored retirement plan that does not guarantee a specified level of retirement income to each participant. Benefits are based on the income derived from the investment of the contributions.

Derivatives

Investment instrument whose value is based on an underlying asset, index or other investment.

Discount

The amount by which the bond's par value exceeds it's current selling price on the secondary market.

Distribution

Mutual fund payments made to unit holders based on interest or dividend income or on realized capital gains on securities.

Distribution date

Date on which a mutual fund pays out a distribution to unit holders.

Diversification

Investment strategy designed to reduce risk by spreading assets among various types of investments, businesses and locations, which are unlikely to move in the same direction. Diversification allows for consistent performance under different economic conditions.

Dividend

Amount of earnings distributed by a corporation to its shareholders based on the number of shares they hold. The dividend paid on preferred shares is generally a set amount, whereas the dividend paid on common shares varies according to corporate earnings. A corporation is not legally required to declare dividends.

Dividend fund

Mutual fund that invests in first preferred shares and common shares that generally pay regular dividends at above-average rates.

Dividend tax credit

A tax credit given to Canadian investors on the dividends they receive from taxable Canadian corporations as an incentive to invest in those corporations.

Dollar cost averaging 

An investment strategy in which securities are purchased in fixed dollar amounts at regular intervals. The investor buys more shares or units when prices are low and fewer when prices are high.

Dow Jones Industrial Index

A price-weighted average Index that tracks the performance of 30 large U.S. corporations, generally industry leaders.

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E

Earned income

For tax purposes, the income earned by an individual is generally made up of employment income and certain taxable benefits. The maximum RRSP contributions are based on the earned income.

Earnings per share (EPS)

Earnings per share is calculated by dividing a corporation's net income (or earnings) over the past 12 months by the number of outstanding shares. For example, if a corporation earned $10 million and has 5 million shares outstanding, it would report earnings of $2 per share.

Equity fund

Mutual fund that invests primarily in common stocks.

European-style option

It represents a type of option where the holder had the right to exercise only at the maturity date.

Ex-dividend

Said of stock that does not include any dividend.  The buyer of the stock selling ex-dividend will not have the right to receive any recently declared dividend.

Ex-dividend date

Date at which a stock starts to trade ex-dividend.

Exercise price

It is the agreed-upon price at which the underlying security can be bought for a call option or sold for a put option. It is also referred to as strike price.

Expense ratio

Total mutual fund operating expenses, expressed as a percentage of the net asset value of the fund. The expense ratio includes management fees and other fund expenses such as brokerage commissions as well as audit and legal fees charged directly to the fund. The published rates of return are calculated after the expense ratio is deducted.

Exchange-traded fund

A mutual fund that tracks an index, sector or commodity that trades like a stock on an exchange.

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F

Face value

It is the nominal value of a bond stated by the issuer. The face value is what is received upon maturity of the bond.

Fair market value 

Price of an asset that has been agreed-upon by two parties that have knowledge and willingness to trade that asset.   Serves as an asset valuation standard in the event of a possible sale.

Financial adviser

Firm or individual that sells investment advice in exchange for fees.

Fiscal policy

The federal government's economic management policy based on spending and taxation.

Fixed amount withdrawal plan

Plan offered by mutual fund companies whereby an investor receives fixed payments from his investment. The interval between each payment is generally one month or one quarter.

Fixed asset

Tangible property with a relatively long or permanent existence, such as land or buildings, that is intended to be used rather than converted or resold.

Fixed income security

Securities that pay out a predictable and stable income over a certain period such as bonds or preferred shares.

Fixed period withdrawal plan

Plan offered by mutual fund companies whereby an investor's assets are returned in total by the end of the plan in the form of regular withdrawals over a specified period. A determined amount of capital, plus accrued income, is withdrawn automatically.

Front load fund

Type of mutual fund that applies a sales charge upon the purchase. This fee can either be a fixed amount or a percentage of the value of the investment.

Forward contract

Non-standardized contract similar to a futures contract but is traded on the over-the-counter market.  The seller agrees to deliver a commodity or a financial instrument at a particular price and at a stipulated future date.

Front-end load fund

Mutual funds that charge a fee at the time units are purchased.

Fundamental analysis

Value analysis based on fundamental data from a corporation's financial statements and on market conditions.

Futures contract

Contract in which the seller agrees to deliver a specific commodity or financial instrument at a particular price and at a stipulated future date. Futures contracts are traded on the stock market. Unlike a forward contract, terms and conditions are standardized by the stock market.

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G

Global equity fund

This type of fund invests in several international stock markets, including the U.S. Its objective is to generate long-term capital growth and provide protection against a devaluation of the Canadian dollar.

Gross domestic product (GDP)

Value of all finished goods and services produced in a country over one year.

Growth stock

Stock of a corporation expected to show faster-than-average gains in earnings relative to the overall market. This type of stock often sports a very high price/earnings ratio given that investors are willing to bid higher for a better growth outlook.  Growth stock usually pay little dividend as the company prefers to invest the income in future expansion.

Guaranteed investment certificate (GIC)

A deposit investment issued by most financial offering a fixed return during a specified term.

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H

Hedge fund

A mutual fund that employs aggressive and complex investment techniques not available to standard mutual funds. Due to the risk associated with hedge funds, they are often offered to a limited number of accredited investor and require a large initial investment.

Hedging

Investment technique used to reduce potential of loss from price fluctuations. Hedging involves taking an offsetting position in the market with the use of derivatives.

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I

Immediate payment annuity

Contract generally sold by a life insurance company with a payout plan that begins immediately for the beneficiary or annuitant. The contract is bought with a single lump-sum payment.

Income fund

Mutual fund that invests primarily in fixed-income securities, such as bonds, mortgage-backed securities and preferred shares. The fund's main objective is to generate income while preserving capital.

Income statement

Financial statement showing a corporation's revenues and expenses that result in a profit or loss for a given period.

Index

Statistical measurement of a securities exchange (market index) or of the economy based on the return on shares or other components.   It is a portfolio that has been built to mimic a specific market and is often used as a benchmark.  Examples include the S&P/TSX Index (formerly the TSE 300), the S&P 500 Index and the Consumer Price Index (CPI).

Index fund

Mutual fund whose portfolio tracks that of a particular market index. The fund's objective is to mirror the general movement of the market where the fund invests its assets, thus offering a broad market exposure to potential investors.

Inflation

General and sustained increase in the average price level of goods and services in the economy consequently decreasing purchasing power. In Canada, the Consumer Price Index is generally used to measure inflation.

Initial public offering (IPO) 

A corporation's first offering of stock on the market when it goes public.

Insider

A director, manager or any other person who has access to confidential information about the corporation as well as any person or entity that holds more than 10% of the voting shares in a corporation.

Insurance policy - universal life

Temporary life insurance policy that can be renewed each year and that includes both insurance and investment components. The investment component consists of investing excess premiums to generate a return for the insured and can also be withdrawn or borrowed. The Insurance element is paid out upon death of the policy holder.

Interest rate spread

Difference between the interest rate a financial institution pays on deposits and the higher rate it charges on loans.

International equity fund

Mutual fund that invests in one or several stock markets outside North America and seeks capital appreciation through international diversification while protecting investments against a lower Canadian dollar.

Interest

Payment made to the lender by the borrower for the use of borrowed money. The total cost of borrowing the money is determined by the principal amount and the annual interest rate.

Intrinsic value 

For call options, the intrinsic value is the difference between the market value of the stock price and exercise price of the option (and vice versa for put options).

Intrinsic value may also represent the true value of a company or asset.

Investment adviser

Person who provides advice and conducts analysis on securities in return for a fee.

Investment objective

Desired investment goal by the fund manager or advisor based on the client’s need and ideal portfolio mix.

Investment profile

Investment strategy tailored to each investor based on individual financial situation, future needs and risk tolerance. The investment profile needs to be regularly reviewed in order for it to remain consistent with changing circumstances and goals.

Initial public offering (IPO)

The initial sale of a stock from a private company to the public. Companies undertake an initial public offering with the help of an underwriting firm that helps determine the price and time of the offering and also ensures that the company has complied with the strict regulations.

Investment company 

Organization that uses pooled capital to invest in securities.  There are two principal types: closed-end investment companies and mutual fund companies, which in turn are divided into two categories based on whether they are incorporated or a trust, namely open-end investment companies and mutual funds. Shares in closed-end investment companies can easily be traded on the open market like any other stock. Mutual fund companies sell their own shares to investors and are not listed on an exchange. They issue more units as demand increases.

Investment Funds Institute of Canada (IFIC)

Professional association set up to serve the members of the investment funds industry.  It’s main mandate is to facilitate cooperation with regulatory agencies while protecting the interest of mutual fund investors.

Investment policy

Formal agreement between a client and the advisor stating guidelines regarding the utilization of funds.

Investment strategy

The strategy provided by mutual fund companies that outlines how a manager will reach the fund's objectives.

Investor (individual investor)

Person who commits funds to investment products in hopes to reap profit. The term "investor" is generally used to refer to persons who have a significant amount of money to invest or large corporations, while "individual investor" refers to small investors.

Issued capital

Outstanding capital stock of a corporation sold in the form of shares. The number of shares can be equal to or less than the number which the corporation is authorized to issue.

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J

Junior debt

Debt that is unsecured and has a lower priority than other debt instruments in the claim in assets in the event of default.

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K

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L

Labour sponsored fund

Mutual fund sponsored by labour organizations that invest in small and mid-size Canadian companies. Often, labour sponsored funds offer some tax benefit to investors as they want to encourage the financing of growing companies.

Letter of intent

An agreement between an advisor and a client where the client agrees to carry out a series of fund transactions in exchange for reduced sales charges. A letter of intent can also make reference to a statement issued by a company detailing future investment or corporate activity.

Leverage

Enhancing return on an investment with borrowed funds, margin accounts or securities that require payment of only a portion of their value (for example, options, subscription rights or subscription warrants).

Liability

A corporation's overall debts and expenses in the form of credit balances, loans, mortgages and long-term debts.

Life annuity

Annuity that makes a guaranteed payment to the plan holder for the rest of his or her life.

Life expectancy adjusted withdrawal plan

Plan offered by mutual fund companies whereby an investor's assets are returned in total by the end of the plan in the form of maximum periodic payments during the plan holder's expected lifetime.

Limit order

An order to buy or sell a set number of shares at a specified price or better. In the event of a purchase, a limit order represents the maximum amount the investor is willing to pay whereas for a sale it represents the minimum price per share willing to accept.

Liquidity

1. The capacity of a market for a particular security to absorb normal levels of buying and selling without wide fluctuations in price.
2. A corporation's cash flow position.
3. Cash or securities that can be converted to cash that make up a company's cash flow position.

Long

Being “long” signifies owning the shares. For example, if an investor is long 500 shares of ABC it means that he or she currently holds the shares.

Long-term bond

Bond with a maturity of over 10 years.

Long-term debt

All of a corporation's debt obligations due in one year or more.

Long-term options

Publicly traded options contracts with a term longer than one year.

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M

Management company

Firm that is responsible for mutual fund portfolio investments and/or fund management. The firm's remuneration is based on a percentage of the fund's total assets.

Management expense ratio (MER)

Important variable that measures a fund's total management fees and is expressed as a percentage of the fund's total average assets.

Management fees

The fees charged by a manager or investment adviser for portfolio management and operations of a fund. The fees are generally based on a fixed percentage of the fund's net asset value.

Margin

Margin refers to the amount of money available to borrow in order to buy securities. The available margin will depend on the value of the assets held within the account.  It also refers to an investment strategy used to offset or reduce the risks associated with future fluctuations in prices, interest rates and exchange rates.

Margin account

Type of account that allows the investor to borrow money in order to purchase securities. The amount that an investor can borrow depends on the value of the assets already held in the account.

Margin call

The amount an investor needs to deposit in a margin account in order to bring it up to the minimum maintenance margin.

Marginal tax rate

Tax rate applied to the last level of a taxpayer's income.

Market capitalization

The total value of a corporation's outstanding stock that is owned by investors. The market capitalization of a corporation that has issued 10 million shares that are trading at $10 each is therefore $100 million ($10 X 10 million shares).

Market maker

Authorized trader who is employed by a securities firm and required by applicable self-regulatory agencies to maintain reasonable liquidity in securities markets by making firm bids or offers for one or more designated securities.

Maker order

An order sent to buy or sell a security immediately at the best available price.

Market price

Price at which a security would likely be sold in an open marketplace.

Market value

See fair market value definition.

Maturity

Date on which a bond, debenture or loan becomes due and payable.

Money market

Part of the financial market where short-term instruments such as Treasury bills, commercial paper and banker's acceptances are traded. Money market also refers to a category of financial instruments that are highly liquid with maturities that vary from a couple of days to just under one year.

Money market fund

Mutual fund that invests primarily in Treasury bills and other short-term securities that carry little risk.

Money supply

Money supply represents the total supply of money in circulation in a country. Money supply can be categorized as follows:
M-1: The narrowest and most common definition is the sum of all coins and bank notes in circulation, demand deposits held by banks and other financial institutions and all traveller's cheques.
M-2: Corresponds to M-1 plus all savings deposits, money market funds and certain bank reserves.
M-3: Corresponds to M-2 plus large-denomination term deposits (for the most part held by corporations) and certain additional reserves held by financial institutions.

Monetary policy

Policy adopted by the federal government, through the Bank of Canada, to control credit and money supply.

Mortgage fund

Mutual fund that invests in mortgage loans. Its portfolio is generally made up of first mortgage loans on residential properties in Canada, although some funds also invest in commercial mortgage loans.

Mutual fund company

See investment company

Mutual fund

See investment company

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N

National Association of Securities Dealers Automated Quotation System (NASDAQ)

Computerized system that allows brokers and dealers to trade securities on the over-the-counter market.

Net asset value (NAV)

In a mutual fund (set up as a trust or a corporation), NAV is the total value of all the assets, determined daily based on the market value of the portfolio, less all liabilities. Also called net worth or net assets.

Net asset value per share (NAVPS)

The net asset value of a mutual fund divided by the number of outstanding units or shares. NAVPS is the basic value of a unit or share.

Nominal interest rate

Annual interest rate stipulated in a loan or contract without taking into consideration inflation.

Nominal value

Value of a bond or a debenture as given on the certificate. The nominal value generally represents the amount repaid to the investor upon hence does not change through the life of the investment.

Non cumulative

Type of preferred share for which omitted dividends will not be paid in the future.

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O

Odd lot

Order in which the number of shares traded are less than the standard units of trading.

Open-end fund

Type of mutual fund that continuously redeems and sells units. Unlike close-end funds, it does not have restrictions on the number of units it is allowed to issue. Standard mutual funds fall under this category.

Option

A derivative contract that allows the buyer the right but not the obligation to buy (call) or sell (put) a security at a stipulated price during a certain period  of time (American option) or at a specific date (European option).

Over-the-counter

Said of transactions on securities not listed on an organized exchange.

Over-the-counter market

Market made up of security dealers trading over the phone or through a computer. It is a decentralized market.

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P

Par value

Nominal value attributed to a security.  The par value of a common share generally has little relation to its price, and "no-par-value" shares are now common. The par value of a preferred share is significant, since it indicates the amount each preferred share will represent in the event of liquidation.  For debt securities, the par value is the amount the investor receives upon maturity.

Payment date

Day on which a company is scheduled to pay dividends to it's shareholders.

Penny stock

Type of stock that has a low market price and that trades on the over-the-counter markets. This type of investment is seen as highly speculative.

Pension adjustment

Amount calculated based on the contributions made or benefits earned during the year under an employer pension plan. The pension adjustment enables taxpayers to calculate the amount they can contribute to an RRSP in addition to contributions to a registered pension plan.

Periodic payment plan (contractual plan)

See dollar cost averaging

Portfolio

Total securities held by a mutual fund company, an individual investor or a corporation.

Preferred share

Share of a corporation that pays a set dividend ahead of common shareholders and, in the event of liquidation, entitles the holder to a fixed amount. Preferred shares do not ordinarily carry voting rights unless a stipulated dividend amount has not been paid.

Preliminary prospectus

Prospectus published by an underwriter used to asses the public interest in a new issue while it is being reviewed by the securities commission. A preliminary prospectus will only contain some of the information found in the final prospectus.

Premium

1. Amount by which a bond sells above its par value.
2. Amount paid to maintain an insurance policy.
3. Amount that represents the cost of an option.

Present value

Today's value of an amount payable in the future discounted at the applicable interest rate.

Price/earnings multiple (ratio)

Price of a common stock divided by net earnings per share from the latest year.  This ratio gives an investors an indication of how much the company`s earnings are costing them. A high P/E ratio could indicate future expectation of earnings growth as opposed to a lower P/E ratio.

Primary market

Market for new issues of securities that are offered to investors for the first time. Capital users such as corporations and governments draw on the primary market for capital.

Prime rate

Interest rate charged by a chartered bank to its most creditworthy customers.

Principal

1. The person for whom a broker carries out a trade.
2. Original amount invested in a security.
3. Amount of loan that remains unpaid.

Private placement

Selling of securities to a select number of investors, usually institutional, in order to raise capital. Shares sold through a private placement are not listed on an organized exchange.

Prospectus

Legal document that sets forth the details about securities issued to the public by a business corporation or other legal entity.

Protective put

An option strategy whereby an investor holds a position in the underlying asset (long) and simultaneously buys a put option on that same asset. Investors who employ this strategy want to protect an unrealised gain in the event of a price decrease.

Public offering

Offering of a security's new issue to the public.

Purchasing power

The volume of goods and services that a certain amount of money can buy.

Put option

A put option allows the investor to sell an underlying security at a pre-determined price (exercise price) during a prescribed period or specified date. An investor would purchase the put option if there is an expected decrease in the price of the underlying security. In order to acquire the right to sell the security at the exercise price, the buyer of the option pays a premium to the seller.

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Q

Quantitative analysis

Analysis of trends in respect of economic variables and securities designed to identify and benefit from disparities.

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R

Ratio withdrawal plan

Plan offered by mutual fund companies whereby the investor receives income based on a percentage of the value of the units or shares held in the plan.

Real estate investment trust

Investment trust that invests mainly in commercial and/or residential real estate and aims to generate income and capital gains. Like stocks, real estate investment trusts are listed on major stock exchanges.

Record date

Date established by the issuer by which the investor must officially own the shares to be entitled to a dividend. The record date is usually set two business days after the ex-dividend date.

Retractable preferred shares

Preferred shares that can be redeemed for cash by either the investor or the corporation.  Some retractable preferred shares also offer the option to be exchanged for common shares.

Redemption fees

Fees paid when back-end load mutual fund units are sold or redeemed.

Registered Education Savings Plan (RESP)

Investment program that allows the accumulation of tax-sheltered contributions until the child begins post-secondary studies. The plan benefits from the Canadian Education Savings Grant (CESG).

Registered Retirement Income Fund (RRIF)

Income tax deferral method available to the holder of a Registered Retirement Savings Plan. The holder invests the amount withdrawn from the RRSP into the RRIF, and each year is required to withdraw a portion. The withdrawals are then taxable.

Registered Retirement Savings Plan (RRSP)

Plan that enables an individual investor to postpone the payment of tax on funds set aside for retirement purposes. The holder invests in one or several types of investments that are held in trust under the terms of the plan. The tax payable on contributions and capital gains earned on investments is deferred and charged upon withdrawal at retirement.

Retained earnings (RE)

A corporation's accumulated net profits that are used to either pay off debt or be reinvested in the business.

Retractable bond

Bond that may be redeemed by the holder prior to maturity at par value.

Return on investment

The profit made from an investment. The return on investment ratio is the percentage obtained by dividing net earnings by the invested capital. For example, a $1,000 investment resulting in annual net earnings of $150 will have a 15% return on investment.

Rights

A security entitling existing shareholders to purchase additional shares of a company at a predetermined price. Rights are issued for a short period of time.

Risk

Possibility of future loss on the initial investment.

Risk premium

The return on a fund (or an index) less the risk-free return rate. Risk-free rates are represented by the return generated by short-term federal government bonds (91-day Treasury bills).

Round lot

Standard number of shares set by stock markets for trading purposes. The number of shares in a round lot varies based on the security price, but for the most part, a round lot is 100 shares.

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S

S&P/TSX Index

Index that reflects the return of the Canadian stock market. It represents the weighted average of the largest companies listed on the Toronto Stock Exchange.  The index is divided into 10 different sectors.

S&P/TSX 60 Index

Index that reflects the weighted average of the 60 largest and most liquid Canadian corporations.

S&P 500 Index

Index that measures the overall performance of the U.S. economy by tracking changes in the market value of 500 stocks representing major corporations in all industries.

Secondary market 

Market where investors trade with one another rather than from the issuing company.

Securities Act

Provincial legislation applied by the Securities Commission in each province that govern how securities may be issued and traded.

Securities broker

Brokerage firm or individual associated with a brokerage firm that underwrites issues or carries out transactions on debt securities as a market maker. A securities broker holds the traded securities or acts on behalf of a client. When acting on behalf of a client, a securities broker generally does not hold traded securities, and his commission is equal to the brokerage fee charged on each transaction.

Security

Investment instrument offered by a corporation, a government or other organizations. Securities may include common and preferred shares, debt instruments and mutual fund units.

Segregated fund

Fund offered by insurance companies as a substitute for mutual funds. Like mutual funds, they offer a variety of investment objectives and asset categories. They guarantee that investors will receive a minimum percentage of the invested amount at maturity (generally at least 75%).

Shareholder’s equity (equity capital)

Balance sheet item that represents asset ownership less external liabilities. Owner's equity is the total portion of a corporation belonging to the owners.

Short selling

Sale of securities not owned by the seller. Speculative technique used to take advantage of an anticipated decline in the price, enabling the investor to buy the securities at a lower price and thus make a profit.

Settlement date

Date by which the seller must deliver the securities bought by a client, and by which the buyer must pay for the purchase. The settlement date is generally the third business day following the transaction.

Share

Unit of ownership in a corporation's capital stock.

Short-term bond

Bond or debenture that has a maturity that is between one to five years.

Short-term debt

Corporate debt obligation coming due within one year. Short-term debt generally includes bank loans, notes payable and the current portion of long-term debt.

Simplified prospectus

An abbreviated prospectus distributed by mutual fund companies to unit holders and potential buyers by the mutual fund company.

SPDR (Standard & Poor Depository Receipts (SPDR)

Certificates that represent ownership in foreign corporations that are tracked by a Standard & Poor's index. SPDRs enable investors to buy shares in corporations listed on the S&P 500 index in a single security.

Specialized fund

Mutual fund that focuses its investments in a specific economic sector, industry or geographic region.

Spousal Registered Retirement Savings Plan

Type of RRSP where the contributor of the account is the spouse of the beneficiary. Although the funds belong to the beneficiary, it is the contributing spouse that receives the tax deductions.

Spread

Difference between bid and ask prices for a security.  It also refers to an position in options trading.

Standard deviation

Statistical measure used to calculate an investment's volatility.

Stock split

A stock split is a corporate action approved by the board of directors of the listed company to increase the stock’s liquidity. It increases the number of shares outstanding and reduces the stock price. Many split ratios exist, the most common being the 2-for-1 ratio. For example, suppose you hold 100 shares of the ABC stock at $20 each and the company announces a 2-for-1 split, you will now hold 200 shares at a price of $10. The reverse is true in case of a consolidation.

Corporate actions have a temporary impact on the portfolio’s value, until necessary adjustments to your brokerage account are made. Usually, the delay is between 5 to 10 business days. The share price will reflect the information provided by the Exchange where the stock is listed. The quantity will be adjusted with information from the transfer agent.

Stock Savings plan (SSP)

Plan in which certain provinces grant individual investors a tax deduction or tax credit on investments in certain stocks. The credit or deduction represents a percentage of the investment value.

Stop buy order

A buy order that is executed only when the specified price has been reached. When the market price rises to the limit price, the stop buy order automatically becomes a market order. This type of transaction is used to protect a short position.

Stop sell order

A sell order that is executed only when the specified price has been reached. When the market price drops to the limit price, the stop sell order automatically becomes a market order. This type of transaction, also referred to as a stop-loss, is used to protect an investor`s loss on a position.

Strategic asset allocation

Apportioning funds among the various categories of assets in order to maintain a relatively stable allocation. Strategic allocation is based on long-term economic and financial forecasts and seeks to maximize return while minimizing risk.

Style-bottom-up approach (shares)

This approach focuses on individual companies, rather than the industry in which they operate. Unlike the top-down approach, this approach assumes that a company that shows outstanding qualities will generate higher long-term returns, regardless of the industry or country where it operates.

Style-growth investing (shares)

Managers who adopt this approach are willing to pay a higher price for future earnings, given the above-average growth forecasts for these stocks. Unlike value investing, the company's potential is well known to the market, resulting in a share price that is somewhat high with respect to reported earnings. Therefore, these companies typically carry higher price/earnings ratios.

Style - interest-rate anticipation (fixed income)

Under this approach, the manager changes the average maturity and, as a result, the term of his bond portfolio, based on anticipated interest-rate movements. An anticipated rate hike will result in a shorter average maturity, whereas an anticipated drop in rates will extend maturities. The aggressiveness of the management style will be reflected in the range of changes made to the portfolio.

Style - momentum investing (shares)

According to this approach, managers take advantage of a stock's upward momentum. They select companies that not only report growth in earnings but also have a higher rate of growth. This type of management is considered to be quite aggressive, given that any sign of slower growth causes investors to unload their shares. Therefore, under momentum investing, transactions are frequent and investors benefit little from deferral of capital gains.

Style - sector rotation approach (shares)

This approach is directly related to the top-down approach. A manager using this approach will invest primarily in sectors with the highest potential and will invest in these sectors in proportions that are higher than the reference index allocation. This approach is considered to be quite aggressive given that it increases fluctuations in returns compared with the reference index. As a result, when the manager overweighs sectors on the upswing, the performance is outstanding, but when the overweighed sectors underperform, the returns are disappointing. This approach typically results in frequent transactions given that the manager follows the economic cycle. Therefore, the investor benefits very little from deferral of capital gains.

Style - spread analysis (fixed income)

Primarily used in the management of provincial and corporate bond funds, this approach conducts a detailed analysis of an issuer's credit risk. The return is then measured against the level of risk to identify and benefit from any discrepancies. Securities with an above-average return given the identified level of risk are preferred. The manager may regularly shift the percentage allocated to each bond category (corporate, provincial, federal) based on economic forecasts in an attempt to benefit from the increase or decrease in yield spreads between the categories. For example, if the manager expects a recession, he may increase the proportion of federal bonds held in the portfolio and if he expects strong economic growth, he may overweight corporate bonds. This approach is often used for high-return funds.

Style - top-down approach (shares)

With this approach, management relies heavily on macroeconomic analysis. The manager chooses the sectors or, in the case of international management, the countries that are likely to generate higher returns. Proponents of this approach maintain that the overall growth of a sector or a country will have a significant impact on the performance of an individual stock. In other words, it is advisable to invest in a company operating in a sector or economy experiencing growth rather than a company that appears to be of higher quality but operates in a less favourable environment.

Style - value investing (shares)

Managers using this approach search for companies with price/earnings ratios considered to be low. As the market recognizes a company's value, the price/earnings ratio and the share price will rise. Instead of being based on dramatically improved financial results, this value will be derived from factors such as a competitive edge, superior technology or an outstanding management team.

Subscription right

Temporary privilege entitling common shareholders to purchase additional shares directly from the corporation. Rights are issued to shareholders based on the number of shares they hold at a pre-determined price that is usually below the market price. For rights, the subscription period is relatively short. If the investor fails to exercise or sell the rights before the expiry, there is monetary loss.

Subscription warrant

Temporary privilege entitling common shareholders to purchase additional shares directly from the corporation. Unlike rights, warrant’s subscription period is longer and is often measured in years. Failure to exercise or sell before maturity will also result in monetary loss.

Systematic risk (non-diversifiable risk)

Also known as market risk, systematic risk that affects the market as a whole and thus cannot be fully diluted by diversification.  The measure of systematic risk is the beta coefficient.

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T

Tactical asset allocation

A portfolio management strategy that involves balancing the portfolio based on market and price inefficiencies or strong market sectors.

Takeover bid

Offer made to security holders of a corporation to purchase a given number of voting shares that, with the offeror's already owned shares, will in total exceed 20% of the outstanding voting shares of the target corporation. For federally incorporated companies, the equivalent requirement is more than 10% of the outstanding voting shares.

Tax credit

Amount that can be deducted from the amount of taxes payable to the government.

Tax deduction

Amount that may be deducted from adjusted  gross income before determining tax payable.

Tax Free Savings Account (TFSA)

Type of account created by the Canadian Government in 2009 that allows an investor not to avoid incurring any taxes on capital gains, interest, or dividends generated within the account.  There is a yearly contribution limit of 5000$ and any unused contribution room can be carried forward to the following year.

Technical analysis

Method of evaluating securities and future market trends based on the statistical analysis of price changes, trading volume and other variables to create a benchmark. Technical analysis is used to anticipate changes in stock prices.

Tender offer

Bid made by one company to buy shares from another company's existing shareholders. A tender offer is made on friendly terms and the price offered is usually above the market price.

Term

Weighted average of the discounted value of principal and interest payments on a bond, expressed in years.

Term life insurance

Life insurance that offers protection for a specified period.

Transaction costs

Consist mainly of the commission paid to the broker or representative by the mutual fund company.

Transfer agent

A trust company, assigned by a corporation, which is responsible for keeping record of shareholder information and distributing dividend cheques.

Treasury Bill

A short-term debt security issued by the federal government, usually for a term of 1 month to one year. Denominations vary from $1,000 to $1,000,000. Treasury bills do not pay interest but are sold at a discount and mature at par.  The difference between the issue price and the par value at maturity represents the income which the lender or purchaser receives in lieu of interest. The gain is taxed as interest income.

Trust

A relationship whereby one person (trustor) gives another person (trustee) the right to control assets or property for a third party (beneficiary).

Turnover rate

The frequency with which a manager renews his portfolio. For example, a 200% turnover rate over one year means the manager fully renewed the portfolio twice, whereas a 50% turnover rate means he renewed only half of the portfolio.  A fund with a higher turnover rate may generate higher capital gain taxed and trading costs.

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U

Underlying asset

It is a financial instrument upon which a derivative contract, such as an option, is based.

Underwriter

Investment company that buys securities directly from the issuer for resale to other investment companies or the public or for sale to the public on behalf of the issuer.

Unit holder

Investor who purchases mutual fund units.

Unit price

The price of most fund units is calculated daily. However, some funds calculate the unit price on a weekly, monthly or quarterly basis. It is important to know when the unit price is determined given that units can be bought or sold at that time.

Unsystematic risk (diversifiable risk)

Risk that is inherent to a specific security as opposed to the market as a whole. This type of risk can be diluted with diversification of a portfolio.

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V

Variable annuity

Life annuity whose value fluctuates based on the return on investments.

Variable rate preferred shares

Preferred shares with dividend amounts that fluctuate based on the company's returns.

Vesting

It represents the entitlement of a pension plan participant, who fulfills certain conditions to receive pension benefits whether or not the participant is still working for the same employer. All or part of the employer's contributions are then vested and the participant is assured of receiving a deferred pension or a lump sum.

Volatility

A measure of the fluctuations in the price of a security over a given period. Volatility is generally expressed as the standard deviation of the daily price fluctuations of a security on an annual basis.

Voting right

A right a shareholder has in voting on matters of corporate policy. Each common share has one voting right whereas preferred shares usually do not carry voting rights.

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W

Whole life insurance

Life insurance for which the policyholder pays an annual premium, normally until the death of the insured. This type of insurance policy includes a savings portion known as the surrender value.

Working capital

Represents the company's ability to meet it’s short term debt obligations. It is calculated by subtracting the company's current liabilities from it’s current assets.

Working capital ratio

Calculated by dividing the current assets or a company by it's current liabilities.

Wrap account

An account that charges fees only once a year based on the total assets in the account rather than brokerage fees for each transaction. Each account is managed separately, in accordance with a portfolio model suitable for clients who share the same objectives.

Writer

A seller of a put or call option. The writer receives a premium for the sale of the options.

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X

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Y

Yield curve

Graph that plots the yields of bonds of the same quality with different maturities.

Yield to maturity

The annual rate of return an investor receives on a bond if held until maturity.

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Z

Zero coupon bond

Bonds where the principal has been detached from the coupon payments and each are sold separately.  They are also referred to as strip bonds.

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