Investment Glossary

Please click the first letter of the term you are interested in looking up from the choices below:

A

Adjusted Cost Base (ACB): An asset's original purchase price plus any allowable expenses (according to the Income Tax Act) related to the asset's purchase. To determine the capital gain/loss, subtract the asset's ACB, plus all allowable costs to sell or dispose of the asset, from the selling price.

Asset: Any item of value. Examples are cash, securities, accounts receivable, inventory, office equipment, a house, a car and other property.

Asset Allocation: An investment strategy that diversifies a portfolio among different types of asset classes, such as cash, bonds, stocks, and other investments, each with different risk-return characteristics. A percentage of the portfolio is allocated to each asset class depending on the investor's profile and investible assets. The portfolio is often re-balanced to the original asset mix from time to time as the market values of the asset classes change. A sound asset allocation strategy allows investors to achieve an optimal risk-return trade-off for a portfolio.

Asset Allocation Fund: Similar to a Balanced fund, but typically without specific minimums and maximums for asset classes. The portfolio manager will move funds among equity, money market and fixed income securities according to the economic outlook.

Asset Classes: Categories of assets. The three investment categories consist of cash and equivalents, fixed income and equities.

Average Annual Compound Rate of Return: Another term used for "historical rate of return" normally used in reporting historical performance for mutual funds. It is a calculation of the annual rate of return that would result from an investor re-investing the return generated each year for an investment.

B

Balanced Fund: A mutual fund that seeks to provide a mixture of safety, income and capital appreciation. It invests in a mix of fixed income and equity investments, usually with specific minimum and maximum proportions.

Banker's Acceptances (BAs): Short-term negotiable commercial paper issued by non-financial corporations, but guaranteed as to principal and interest by their banks. The guarantee results in a higher issue price and hence, lower yield.

Bond: A certificate providing evidence of a debt of the issuer. It states the principal amount, the maturity date and the interest rate. With the exception of government issues, bonds are secured with a pledge of specific assets. An unsecured bond, or one that is secured by the financial strength and/or credit worthiness of the issuer is known as a debenture.

Book Value: The amount of net assets belonging to the owners of a business (or shareholders of a company) based on balance sheet values.

C

Canadian Equity Fund: A mutual fund that invests primarily in common shares of Canadian companies.

Capital Gains: When a stock is sold for a profit, it's the difference between the net sales price of securities and their net cost, or original basis. If a stock is sold below net cost the difference is a capital loss.

Cash (and equivalents): Investments that guarantee safety of principal and liquidity and typically make up 5% to 20% of a balanced portfolio. Examples include currency, money market securities, Canada Savings Bonds, GICs (with terms less than one year), bonds (with terms less than one year) and cash and equivalent mutual funds.

Closing Price: The final bid/ask price agreed upon each day for a security.

Compounding: If you leave the money you earn in your investment, it in return will earn more money. That's because interest will be paid on the principal as well as the interest that has already been earned thus far.

Compounding Effect: If the investor reinvests the income stream from the fixed income security, the yield will be further enhanced due to the compounding effect.

Concentration Risk: Some mutual funds concentrate their investments in a single industry, country or geographic area. This allows them to focus on the potential of that particular industry, country or area. Other funds, such as index funds, may be permitted to concentrate more of their assets in one or more securities than is usually permitted for mutual funds. This allows them to more accurately track the performance of their target index. Mutual funds that concentrate their investments tend to have greater fluctuations in price than funds with broader diversification. This is because they invest in fewer securities, and in the case of industry, country or geographically restricted funds, those securities may be affected by the same factors.

Convertible Bonds: A bond that may be exchanged by the owner, usually for common stock of the same company.

Currency Risk: Changes in the exchange rate between the currency that an investment is purchased in and the Canadian dollar affect the value of the investment.

D

Denomination: The amount the issuer agrees to repay at maturity. This amount is quoted on the bond and is known as the face value as well as the denomination. The most common denominations are $1,000 and $10,000.

Derivatives: Investments that derive their value from the price of another investment or from anticipated movements in interest rates, currency exchange rates or market indexes.

Dividends: A dividend is a portion of a company's profit paid to preferred and common shareholders. A stock selling for $20 a share with an annual dividend of $1 a share yields the investor 5%.

Dollar Cost Averaging: The strategy of investing a fixed amount of dollars in a specific security at regular intervals, thereby lowering the average cost per share.

E

Efficient/Optimized Investment Portfolio: A portfolio that has the highest expected return for its expected risk.

Equities: Investments that have no guarantee of safety of capital but are a potential for generation of capital gains which can account for 10% to 80% of a balanced portfolio. Examples include common shares, derivatives, convertible bonds, preferred shares and equity mutual funds.

Equity Mutual Funds: Pools of money, from many investors, that are used to purchase common shares and other equity securities of companies in Canada and around the world.

F

Face Value: The value of a bond or debenture that appears on the face of the certificate. Face value is ordinarily the amount the issuer will pay at maturity. Face value is not an indicator of market value.

Fixed Income: Investments that have some safety of principal and a potential for capital gains that typically account for 15% to 70% of a balanced portfolio. Examples include bonds and GICs with maturities greater than one-year, strip bonds, mortgage-backed securities, private placements and other debt instruments, preferred shares (not including convertible securities) and income mutual funds.

Fixed Income Mutual Fund: An investment fund that uses the proceeds from units sold to investors to invest in securities that generate a reasonably predictable stream of interest or dividend income, such as bonds, debentures and preferred shares.

Foreign Equity Fund: A mutual fund that primarily invests in common shares of foreign companies.

Foreign Investment Risk: Investments issued by foreign companies or governments other than the U.S. can be riskier than investments in Canada and the U.S. Foreign countries can be affected by political, social, legal or diplomatic developments, including the imposition of currency and exchange controls. Some foreign markets can be less liquid, are less regulated and are subject to different reporting practices and disclosure requirements than issuers in North American markets. It may be more difficult to enforce a fund's legal rights in jurisdictions outside of Canada. In general, securities issued in more developed markets, such as Western Europe, have lower foreign investment risk. Securities issued in emerging or developing markets, such as Southeast Asia or Latin America, have significant foreign investment risk and are exposed to the emerging markets risks.

Forward Contracts: A contract in which the seller agrees to deliver a specified commodity or financial instrument at a specified price sometime in the future. The terms of a forward contract are negotiated at the time of the trade. Forward contracts trade "over the counter", as opposed to trading on a market.

G

Growth Equities: A growth investment will have average risk, moderate capitalization and a potential for above average growth in earnings. Typically, these investments have an aggressive management team, and a higher income retention rate resulting in a lower dividend payout. A higher P/E ratio and a potentially greater chance for price volatility also characterize a growth investment.

Growth Managers: Fund Managers whose style is to select stocks for growth or perceived growth potential with valuation typically being a secondary consideration.

Growth Risk Category (Equities): This category of equity securities is medium risk, with average capitalization, potential for above average growth in earnings, aggressive management, lower dividend payout, higher P/E ratio and has a potentially higher price.

H

Historical Rate of Return: Another term used for "average annual compound rate of return" normally used in reporting historical performance for mutual funds. It is a calculation of the annual rate of return that would result from an investor re-investing the return generated each year for an investment.

I

Inflation Risk: A risk of investing in fixed income instruments is the threat of inflation. The bond market reacts strongly not only to actual inflation, but also to the threat of inflation. A report that the economy is gaining strength and unemployment is falling can cause bond prices to fall and yields to rise. The reason for this is that investors who buy and hold bonds or other fixed income investments may be looking at a term of 10 years before receiving the principal amount invested. If there is a high rate of inflation during this term, then the principal amount to be received will lose purchasing power. Additionally, the steady stream of interest payments the investor is receiving will also be losing purchasing power. To offset this rising general level of prices, investors will expect higher yields on their fixed income investments.

Interest Rate Risk: In general, rising interest rates cause fixed income investments to decrease in value and falling interest rates cause fixed income investments to increase in value. Fixed income investments with longer terms to maturity tend to be more sensitive to changes in interest rates. If an investor has invested directly in a fixed income security, such as a bond, this will be a concern if he/she wishes to sell the bond prior to maturity. If the bond is held to maturity, this type of risk has no impact. If an investor has invested in a bond mutual fund or income mutual fund, then these changes in interest rates and subsequent changes in fixed income security values will lead to changes in the net asset value of the mutual fund. The value of the investment in the mutual fund may decrease or increase.

International Diversification: Investing in more than one country. By diversifying across countries whose economic cycles are not perfectly correlated, investors can reduce the volatility of their investments.

L

Liquidity Risk: Liquidity is a measure of how quickly an investment can be sold for cash at a fair market price. If a fund can't sell an investment quickly, it may lose money or make a lower profit, especially if it has to meet a large number of redemption requests. In general, investments in smaller companies, smaller markets or certain sectors of the economy tend to be less liquid than other types of investments. The less liquid an investment, the more its value tends to fluctuate.

Long Term Investments: Investments lasting longer than 5 years.

Low (or no) Risk: A conservative investment such as a Canada Savings Bond that pays a fixed interest rate based on current rates that is virtually risk free.

M

Management expense ratio: The management expense ratio (MER) shows the percentage of the fund's daily average net assets that was paid in management fees and other expenses during the year. The MER is shown at an annualized rate if the financial year is less than 12 months. The method of calculating the MER of mutual funds was changed by securities regulators on February 1, 2000. Some expenses, such as taxes and interest that were previously excluded, are now included in the calculation.

Management Fee: The fee that the manager of a mutual fund charges the fund for managing the portfolio and operating the fund. The fee is usually expressed as a percentage of the fund's average net assets.

Market Risk: Refers to risk factors that affect financial markets as a whole. This risk is present in all financial markets, including the money, bond, stock, and currency markets. Market risk is common to all portfolios with securities traded in these particular markets. For example, market risk is present in nearly all equities in the stock market, since the prices of equities generally move together in the same direction. Market risk is due to macro-economic factors, such as major changes in interest rates. See systematic risk.

Market Value: The most recent price at which a security transaction took place.

Moderate (to high) Risk: An investment that is not guaranteed and has a greater possibility of losing the principal that has been invested. As the potential for a higher return increases, so does the risk associated with that investment.

P

P/E Ratios (Price Earnings): A measure of a stock's price in relation to its earnings. A low price earnings ratio is a relatively low price in relation to the earnings of company/stock and a high price earnings ratio is one that is above the market average as a whole. It is calculated by dividing the current price per common share by the current earnings per share (EPS).

Pre-Authorized Contribution (PAC): An investment service (allocation of funds and frequency is the customer's choice) in which customers set up regular deposits to be automatically contributed to their investment.

Preferred Shares: A class of share capital that entitles the owners to a fixed dividend ahead of the company's common shares and to a stated dollar value per share in the event of liquidation. Usually, owners of these do not have voting rights unless a stated number of dividends have been omitted.

R

Return (on investment): The rate of increase for an invested amount of capital. Generally, there are two ways that return is presented - the "simple" rate of return and the "historical" (or compound) rate of return.

Risk: The probability of losing capital. The more risk associated with an asset, the greater the potential for a capital loss. Increased risk can also be understood as a greater range in price or increased volatility.

RSP Clone Fund: RSP clone funds use forward contracts that are linked to the performance of underlying funds. RSP funds are created to mirror the performance of a non-Canadian fund, while remaining 100% eligible for an investor's RSP.

S

Secondary Market: After the initial sale, the securities market where trading takes place between investors. When business or government initially offers securities for sale to investors, it is done through the primary market.

Short Term Investments: Investments lasting less than 1 year.

Simple Rate of Return: The current value of an investment minus the value at the time of purchase divided by the value at the time of purchase.

Small Company Risk: The prices of shares issued by smaller companies tend to fluctuate more than those of larger corporations. Smaller companies may not have established markets for their products and may not have solid financing. These companies generally issue fewer shares, which increases their liquidity risk.

Speculative Equities: Speculative investments result in maximum risk over a short-term. They are typically characterized by maximum price volatility. There are typically no earnings or dividends and consequently the P/E ratio is a useless tool for analysis.

Speculative Risk Category (Equities): This category of equity securities is maximum risk, shorter term, with maximum price volatility, no earnings, no dividends, P/E ratio is not significant.

Style: The way a fund manager selects securities to buy, hold or sell in a mutual fund. The two most common styles are referred to as value and growth.

Systematic Risk: The risk associated with being invested in any market. When stock market averages fall, most individual stocks in the market fall and when interest rates rise, most bonds and fixed income securities fall in value.

T

Tactical Asset Allocation Strategy: Tactical Asset Allocation Strategy is the process by which the asset of a fund is changed on a short-term basis to take advantage of perceived differences in relative values of the various asset classes.

T-bills: Short-term government debts issued in denominations ranging from $1,000 to $1 million. Like many other cash-based investment vehicles, T-Bills do not pay interest but are sold at a discount and mature at par (100 per cent of face value). The difference between the purchase price and par at maturity represents the purchaser's return, and is taxed as interest income.

Technical Indicators (for return on equities): This is one of four areas used to help analyze and predict future equity prices. These are the result of analyzing investor attitudes and market psychology through the interpretation of charts of stock price trends and trading volumes.

Term Deposits: Deposit instruments most commonly available from chartered banks, requiring a minimum investment at a pre-determined rate of interest for a stated term. The interest varies according to the amount invested and term to maturity but is competitive with comparable alternative investments. However, a reduced interest rate will usually apply if funds are withdrawn prior to maturity.

Term to Maturity: The length of time remaining until a bond's principal is to be repaid. For example, when a 10-year bond is issued, it is called a "10-year bond" and has a term to maturity of 10 years. After three years, this bond would have a term to maturity of seven years and would be called a "7-year bond".

U

Unitholder: Refers to an individual or organization that owns one or more units of a mutual fund. The unitholder has certain ownership rights, such as the right to vote on key issues affecting the fund.

V

Value Indicators (for return on equities): This is one of four areas used to help analyze and predict future equity prices. These are the result of analyzing the value ratios for a specific company and comparing these to similar companies within the same industry.

Value Managers: Fund managers whose style is to select stocks that are fundamentally undervalued or out of favour - stocks that are "cheap." Value managers also conduct in-depth examinations of companies, then purchase stock from a perceived "good" company and hold it for the long term until the true value emerges.

Venture Equities: Venture capital investments are high risk and generally have low capitalization. They have a limited earnings record, and do not pay dividends. The P/E ratio is of little consequence due to a short operating history or the fact that they are not yet profitable. As a result these investments have prices that are highly volatile.

Volatility: A measure of risk based on the standard deviation of investment fund performance over 3 years.