| Clear and precise definitions |
This comprehensive alphabetical glossary will help you cut through the financial jargon.
A |
B |
C |
D |
E |
F |
G |
H |
I |
J |
K |
L |
M |
N |
O |
P |
Q |
R |
S |
T |
U |
V |
W-Z
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.
Accrued interest
Interest earned, though not yet payable on bonds or debentures, since the last interest payment date.
Administrator
Person responsible for the safekeeping and management of assets belonging to a third party. As the case may be, 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
Measurement of the specific (residual) risk of a mutual fund compared with the market. A positive alpha value indicates added value that has benefited the investor who accepted a certain risk rather than simply opting for the return on the market. Therefore, alpha measures the value added by the fund manager.
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 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 mix.
90 years annuity certain
Annuity that pays a fixed annual amount until the annuitant reaches the age of 90.
|
| Top of page |
B
Balance sheet
A financial statement that shows a corporation's assets, liabilities and shareholders' equity on a specific date.
Balanced fund (Diversified fund)
The objective of this mutual fund is to build a balanced portfolio made up of bonds and shares in proportions that vary based on market conditions and the forecasts of the fund managers.
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 .01%. Therefore, if bond X has a yield of 8.50% and bond Y's yield is 8.75%, the difference is 25 basis points.
Beta
Measure of a fund's volatility relative to the market. The beta takes into consideration the fund's standard deviation and correlation coefficient compared with its reference index. If a fund has the same volatility as the index, it has a beta of 1. Similarly, if the fund has a standard deviation above the index, it has a beta above 1. And a fund has a beta under 1 if it is less volatile than the index.
Beta coefficient
See beta.
Bid price
The highest price that a prospective buyer is willing to pay for a financial instrument listed on an exchange.
Blue-chip stock
Usually refers to top-quality shares.
Board of Directors
Group elected by the shareholders of a corporation that acts on their behalf and is responsible for the corporation's management. Directors are generally elected each year at the annual meeting.
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 behalf of a client.
Business day
Every day of the year except Saturdays, Sundays and holidays.
Buying on margin
Buying securities in part with borrowed money.
|
| Top of page |
C
Callable bond (redeemable bond)
Bond that the issuer may redeem prior to maturity at the price stipulated in the issuing contract.
Canada Savings Bond (CSB)
CSBs are issued each year by the federal government. 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)
Capital includes the machinery, factories and inventory required to manufacture products, namely capital property.
Capital (in finance)
Money or other property used to carry out business transactions. For an investor, capital is the total amount invested in securities and other assets, plus cash.
Capital gain or loss
A gain or loss resulting from the disposal of an asset that may have tax consequences depending on the nature of the asset sold.
Capital loss
See capital gain or loss.
Capital market
Market consisting of persons, organizations and financial products where capital funds are traded.
Capital stock
The total number of preferred and common stock representing ownership in a corporation.
Capitalization
Method of earning income on the previous portion of investment income through reinvestment. The final value of the investment is made up of the initial investment amount plus the reinvested income.
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.
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, central banking is a function of the Bank of Canada; in the U.S., of 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.
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.
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 fact, compound interest is interest added to interest previously earned.
Consumer price index (CPI)
Measure of change in the cost of living for consumers. The CPI highlights price increases (inflation).
Convertible
Said of a bond, debenture or preferred share that is usually exchangeable for one or more common shares of the same corporation.
Convertible debenture
A debenture that is exchangeable for common shares according to specified conditions.
Corporation
Type of company, created under federal or provincial legislation, which is legally separate and distinct from its shareholders. The shareholders' responsibility for the corporation's debts cannot exceed their invested capital.
Correlation coefficient
Relationship between two variables. The correlation coefficient measures the degree to which two variables are related. 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
Detachable portion of a bond certificate entitling the holder to receive a specified amount in interest when detached and presented at a bank as of the maturity date.
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.
Current asset
Cash and other assets that can be converted into cash in the normal course of business, usually within a year.
Current liability
Amount coming due within a year; for example, 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, that keeps custody of an investment company's securities and cash.
|
| Top of page |
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 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.
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.
Defined benefit pension plan
Plan that 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
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.
Derivative
Investment instrument whose value is based on an underlying asset, index or other investment.
Discount
The difference between a bond's par value and its selling price on the secondary market.
Distribution
Mutual fund payments made to unitholders 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 unitholders. Distribution dates are important for tax purposes. For example, investors who bought fund units just before the distributions are required to declare the gains.
Diversification
Investment strategy designed to reduce risk by spreading assets among various types of investments and purchasing shares issued by various corporations that operate in different sectors or geographic areas.
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
Plan to reduce the average share or unit cost by investing set amounts on a regular basis. The investor buys more shares or units when prices are low and fewer when prices are high.
Dow Jones Industrial Index
Index that tracks the performance of 30 large U.S. corporations, generally industry leaders.
|
| Top of page |
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
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 Union
Created in 1992 by the Maastricht Treaty, the EU consists of the following 15 countries: Germany, Austria, Belgium, Denmark, Spain, Finland, France, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, the United Kingdom and Sweden.
Ex-dividend
Said of stock that does not include any dividend.
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.
|
| Top of page |
F
Fair market value
Price agreed-upon by two rational and willing parties. 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 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.
Forward contract
Contract that is 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.
|
| Top of page |
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.
Goldman Sachs Financial Services Index
Market capitalization-weighted index designed to measure the performance of corporations in the financial services sector. The index focuses on financial institutions that offer regional banking services, trust and banking services in financial centres as well as financial services for corporate and retail clients, such as credit cards, real estate investments and mortgage loans. The index also includes brokerage firms and asset managers, insurance companies (including brokers, life insurance, property and casualty insurance, disability insurance and reinsurance), real estate management and development firms, real estate brokerages and investment companies.
Goldman Sachs Global Technologies Index
Index that includes some 200 global corporations that are dominant in the technology sector. The index is divided into six different sectors: computer hardware, software, semiconductors, multimedia equipment, computer services and the Internet.
Gross domestic product (GDP)
Value of all 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. 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.
Guaranteed investment certificate (GIC)
Security issued by most financial institutions stating that a specific amount was invested at a specified interest rate for a stated term.
|
| Top of page |
H
HIP
See TIP & HIP
HSBC Euro Smaller Companies Index
Index that includes approximately 2,000 European stocks. The market capitalization of the stocks varies between 225 million and 3.5 billion euros.
|
| Top of page |
I
IFC Global Emerging Markets Index
Index of the most liquid stocks in emerging markets according to the World Bank. Market capitalization must total more than US$50 million. The index is now owned by Standard & Poors.
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. Examples include the S&P/TSX index (formerly the TSE 300), the S&P 500 index and the consumer price index.
Index fund
Mutual fund whose portfolio matches 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.
Inflation
General and sustained increase in the average price level of goods and services in the economy. 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 natural or legal person 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 an insurance and an investment component. The investment component consists of investing excess premiums to generate a return for the insured.
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 while protecting investments against a lower Canadian dollar.
Interest
Payment made to the lender by the borrower for the use of money. A business corporation pays interest to its bondholders.
Intrinsic value
Difference between the strike price or exercise price of an option or a subscription warrant and the market value of the underlying security.
Investment adviser (manager)
Financial adviser in respect of a mutual fund; may also be a mutual fund manager.
Investment objective
A mutual fund's investment objective is always presented in its simplified prospectus. The investment objective states whether the fund is focusing on growth, protection of capital, interest income, etc.
Investment company
Organization that uses its capital to buy securities in other companies. 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, cooperate with regulatory agencies and protect the interests of mutual fund investors.
Investment policy (management mandate)
Agreement between a client and the portfolio investment adviser (manager), which includes guidelines for the adviser.
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 seeks to minimize risk, in contrast to a speculator, who is willing to take a calculated risk in the hope of making above-average returns, and a gambler, who accepts even greater risks. 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.
|
| Top of page |
J
J.P. Morgan Global Bond Index
Index that measures the performance of the largest government bond markets in industrialized countries.
|
| Top of page |
L
Lehman Brothers 3-month T-Bill Index
This index represents the average Treasury bill rates for each previous quarter, adjusted based on the equivalent bond return (money market and short-term instruments). The index generally plots the short-term risk-free rate.
Lehman Brothers Aggregate Bond Index
Market value-weighted U.S. index of fixed-rate senior debt instruments such as government and corporate bonds and asset-backed and mortgage-backed securities with maturities of at least one year.
Letter of intent
Agreement by which an individual investor undertakes to carry out a series of mutual fund purchases in exchange for lower acquisition fees.
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 for the rest of the life of the annuitant.
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 planholder's expected lifetime.
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-term bond
Bond with a maturity of over 10 years.
Long-term debt (consolidated)
All of a corporation's debt obligations due in a year or more.
|
| Top of page |
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.
Manager
See investment adviser.
Margin
An investment strategy used to offset or reduce the risks associated with future fluctuations in prices, interest rates and exchange rates.
Margin
The amount or security a client deposits with a brokerage firm that represents a portion of the price of securities or commodities bought on margin. The brokerage firm advances the balance of the agreed-upon price to the client.
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.
Market price
Price at which a security would likely be sold in an open marketplace.
Market value
Agreed-upon price by two rational and willing parties. Serves as an asset valuation standard in the event of a possible sale.
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 fund
Mutual fund that invests primarily in Treasury bills and other short-term securities that carry little risk.
Money supply
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.
MSCI EAFE Index
Index that includes approximately 1,100 stocks from companies in 20 industrialized countries in the Far East, Australasia and Europe. The index does not include North American stocks.
MSCI Europe Index
Index that tracks the performance of the largest corporations in 15 European countries.
MSCI Japan Index
Index that tracks the performance of the largest corporations in Japan's eight major economic sectors.
MSCI Pacific excl. Japan Index
Index that tracks the performance of the largest corporations in the Pacific region, excluding Japan. The countries included in the index are Australia, Malaysia, China (Hong Kong), Singapore and New Zealand.
MSCI World Index
Index based on a sample of approximately 1,600 stocks in 22 industrialized countries.
Mutual fund company
See investment company.
Mutual fund
See investment company.
|
| Top of page |
N
Nesbitt Burns Preferred Stock Index
Index that contains a sample of 50 preferred stocks representing large Canadian corporations.
Nesbitt Burns Small Cap Index
Index based on a sample of 400 stocks representing Canadian corporations with a market capitalization under $1 billion.
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 contract for a coupon bond issue.
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 maturity.
|
| Top of page |
O
Odd lot
Number of shares traded that is less than a round lot.
Option
Right to buy or sell securities or property at an agreed-upon price and for a specified period.
Over the counter
Said of transactions on securities not listed on an organized exchange.
Over-the-counter market
See over the counter.
Owners' 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.
|
| Top of page |
P
Par value
Value attributed to a bond or a share. 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.
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.
Preauthorized transfer plan
Investment plan that authorizes automatic withdrawals from a bank account.
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 that does not include all the information contained in the final prospectus and is used to assess public interest in the issue while it is being reviewed by the securities commission.
Premium
1. Amount by which a bond sells above its par value.
2. Amount paid to maintain an insurance policy.
Present value
Today's value of an amount payable in the future.
Price (market)
Last price at which a security was sold.
Price/earnings multiple (price/earnings ratio)
Price of a common stock divided by net earnings per share from the latest year.
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
The person for whom a broker carries out a trade.
Productivity
Economic production per worker.
Prospectus
Legal document that sets forth the details about securities issued to the public by a business corporation or other legal entity.
Public offering
An issuer's stock offering to the public.
Purchasing power
The volume of goods and services that a certain amount of money can buy.
Put and call options
A put option gives the buyer the right to sell a product, and a call option gives the buyer the right to buy a product. Put options are generally bought by investors who expect the price of the product to fall, and call options are bought by investors who expect the price to increase. Call and put options are available for stocks, bonds, currencies, precious metals, commodities and stock indexes.
|
| Top of page |
Q
Quantitative analysis
Analysis of trends in respect of economic variables and securities designed to identify and benefit from disparities.
|
| Top of page |
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.
RBC DS Canadian Bond Market Index
Index that includes over 800 securities that mature in one year or more. The index reflects the total return posted by the Canadian bond market.
Real estate investment trust
Mutual fund that invests mainly in commercial and/or residential real estate and aims to generate income and capital gains.
Redeemable share (at the option of the corporation)
Share that the issuing corporation can redeem at any time, at a specified price.
Redeemable share (at the option of the holder)
Preferred share which may be redeemed at the option of the holder on a set date and under specified conditions.
Redemption fees
Fees paid when 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. They may or may not be reinvested in the business.
Retractable bond
Bond that may be redeemed by the holder prior to maturity.
Return
Income or capital gain resulting from an investment.
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.
Risk
Possibility of future loss.
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.
|
| Top of page |
S
S&P/TSX Index
Index that reflects the return of the Canadian stock market. It represents the weighted average of a number of 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.
Scotia Capital 91-day T-Bill Index
Index that tracks the daily return on 91-day Canadian Treasury bills.
Scotia Capital Mortgage Index
Index that reflects the overall performance of a sample of Canadian mortgage-backed securities with maturities of 1, 3 or 5 years (data provided by the major Canadian chartered banks).
Scotia Capital Short-Term Bond Index
Index that measures the return on over 350 Canadian government and corporate bonds with maturities between 1 and 5 years.
Scotia Capital Universe Bond Index
Index designed to reflect the overall performance of the Canadian bond market. The index includes Canadian bonds issued by various government agencies and corporations (rated BBB and higher).
Scotia Quebec 90 Index
Index that tracks the daily performance of the 90 largest Quebec-based companies. The index includes 30 large-cap and 60 small-cap companies in Quebec.
Secondary market
Market where investors trade with one another. This allows investors to sell the securities bought on the primary market and obtain cash.
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.
Securities transaction
Purchase or sale of securities on stock or over-the-counter markets.
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%).
Selling short
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 matures within three 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 and simplified prospectus distributed by mutual fund companies to unitholders or shareholders and potential buyers.
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.
Spread
Difference between bid and ask prices for a security.
Standard deviation
Statistical measure that indicates the average monthly variation of an investment return. Data from the previous 36 months, at least, are used to calculate the standard deviation for a fund.
Stock split
Increase in a corporation's number of outstanding shares of stock (each share will be split into X new shares). A holder of 100 shares of Y at $20 each will have 200 Y shares at $10 each if the stock splits 2 for 1.
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.
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 overweights sectors on the upswing, the performance is outstanding, but when the overweighted 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 other common shares directly from the corporation. Rights are issued to shareholders based on the number of shares they hold.
Subscription warrant
Security that entitles the holder to buy stock at a specified price and for a specified period. Generally, they are offered as a sweetener at the time of a new issue.
Surrender value
Amount an insured can receive upon voluntary cancellation of a life insurance policy.
Systematic risk (non-diversifiable risk)
Risk that affects a security or portfolio due to its relationship with the market. Also known as market risk. The measure of systematic risk is the beta coefficient.
Systematic withdrawal plan
Plan offered by mutual fund companies whereby the investor receives income from his investment on a regular basis.
|
| Top of page |
T
Tactical asset allocation
Overweighting asset categories that are likely to outperform in the coming months and underweighting other categories. The shifts in asset percentages of a portfolio are based on short-term economic and financial forecasts and seek to maximize return while minimizing risk.
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 tax payable.
Tax deduction
Amount that may be deducted from total income before determining tax payable.
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.
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.
TIP & HIP
TIPs and HIPs are units in a fund made up of a basket of shares tracked by an index. TIPs allow investors to buy shares of companies listed on the TSE 35 and HIPs are keyed to the TSE 100. TIPs fluctuate in step with the TSE 35 index, and one TIP is equal to a tenth of the value of the index plus accrued dividends. If the TSE 35 is quoted at 350, the cash value of one TIP would be approximately $35 plus accrued dividends. HIPs have the same structure as TIPs but their value is linked to the TSE 100.
Trade balance
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.
Transaction costs
Consist mainly of the commission paid to the broker or representative by the mutual fund company.
Treasury bill
A short-term debt security issued by the federal government, usually for a term of 3 months to 1 year. Denominations vary from $1,000 to $1,000,000. Treasury bills do not pay interest but are sold at a discount (below 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
Relationship in which a person transfers title to property to another person, called the trustee, who undertakes to hold and administer the property for the benefit and use of a designated 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.
|
| Top of page |
U
Underlying instrument
A security that underlies derivatives such as options.
Under 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.
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.
Unitholder
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 leads to an increase or a drop in the value of a security or portfolio and is unrelated to the market.
U.S. equity fund
Mutual fund that generates long-term capital growth by investing mainly in common shares of U.S. corporations.
|
| Top of page |
V
Variable annuity
Life annuity whose value fluctuates based on the return on investments.
Vesting
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.
|
| Top of page |
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.
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.
|
| Top of page |
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.
|
| Top of page |
|
© NATIONAL BANK OF CANADA. All rights reserved 2008.