Some Common Investing Terms, Defined
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Administrator
The person appointed by the court to administer the estate
when there is no will, the will did not name an executor
or all named executors have died or are unwilling to act.
Also referred to as a "personal representative."
Agent for Executor
Where a person or trust company like Royal Trust is hired
by the named executor to provide advice and administration
services.
Assets
Everything a company or person owns or is owed, such as
money, securities, equipment and buildings.
Asset Allocation
The process of dividing investments among different kinds
of assets, such as stocks, bonds, real estate and cash, to
optimize the risk/reward tradeoff based on an individual's
or specific situation and goals. A key concept in financial
planning and money management.
Averages and Indexes or Indices
Statistical tools that measure the state of the stock market
or the economy, based on the performance of stocks, bonds
or other components. The Dow Jones Industrial Average and
the S&P/TSX Composite Index are well-known examples.
B
Balance Sheet
A financial statement showing a company's assets, liabilities
and shareholder's equity on a given date. It shows what the
company owns and what debts it owes.
Bank of Canada
The central bank of Canada, founded in the 1930s to facilitate
the functioning of the financial system. The Bank of Canada
issues and removes bank notes, acts as the federal government's
financial advisor on debt management and foreign exchange,
and conducts monetary policy to regulate the growth of the
country's money supply and influence interest rates.
Bank Rate
The minimum rate at which the Bank of Canada will make short-term
advances to the chartered banks and money market dealers.
Since 1980 the bank rate has been set at 1/4 of 1% (25 basis
points) above the weekly average tender rate of 91-day Government
of Canada treasury bills. The upward and downward trend of
the bank rate affects the prime lending rates that chartered
banks give to their most creditworthy borrowers, as well
as rates on all types of bank deposits, short term paper,
bonds and mortgages.
Bankrupt
The legal status of an individual or company which is unable
to pay its creditors and whose assets are therefore administered
for its creditors by a trustee in bankruptcy.
Bear Market
A market in which prices are declining. A "bear" is a person
who expects that the market or the price of a particular
security will decline.
Beneficial Owner
The real owner of a security. An investor may have securities
registered in the name of a broker, trustee or bank to facilitate
transfer or to preserve anonymity, but the investor is the
beneficial owner and will receive any dividends, interest
or profits from sales.
Beneficiary
A person who receives a benefit or gift under a will, or
a person for whose benefit a trust is created.
Bonds
An investment that pays you interest in semi- annual installments
until a future maturity date, when the issuing government
or company repays the bond s face value. Strictly speaking,
the issuer pledges assets as security, except in the case
of government bonds, but the term is often loosely used to
describe any debt investment. Corporations and the federal,
provincial and municipal governments issue bonds. Bond holders
are first in line before shareholders to claim any of a company's
assets when it goes insolvent.
Broker
A securities firm or an investment advisor associated with
a firm. When acting as a broker for the purchase or sale
of listed stock, the investment advisor does not own the
securities him or herself, but acts as an agent for the buyer
and seller and charges a commission for these services.
Bull Market
A market in which prices are rising. A "bull" is a person
who expects that the market or the price of a particular
security will rise.
C
Canadian Investor Protection Fund (CIPF)
An industry sponsored fund that protects investors from losses
resulting from the bankruptcy of a member firm. The maximum coverage is
$1,000,000 per General Account, with additional coverage for Separate
Accounts as described in the Limits of Coverage. Details can be found
at www.cipf.ca
Canadian Payments Association
This association operates a highly automated national clearing
system for interbank payments which reduces costs and increases
the efficiency of the clearing system in Canada. Members
include chartered banks, trust and loan companies and some
credit unions.
Capital
To economists, capital means the machinery, factories and
inventory required to produce other products. To investors,
capital means their cash plus the financial assets they have
invested in securities, their home and other fixed assets.
Capital Gain or Loss
Profit or loss resulting from the sale of certain assets
classified under the federal income tax legislation as capital
assets. This includes stocks and other investments such as
investment property.
Certificate of Deposit (CD)
A fixed-income debt security issued by most chartered banks,
usually in minimum denominations of $1000 with maturity terms
of one to six years.
Coupon
A mini-certificate actually attached to a bond certificate
which represents an actual interest payment. The coupon becomes
negotiable on the date the interest is due and usually represents
the six month interest payment on the face value of the bond
certificate. The term "coupon" is sometimes used as a slang
reference to the interest rate paid on a debt instrument,
i.e. the coupon of the new Government of Canada March 2015
is 8.75%. This means the interest rate is 8.75% per annum
on the face value of the bond.
D
Debt
Money borrowed from lenders for a variety of corporate or
personal purposes. The borrower pays interest for the use
of the money and is obligated to repay the principal amount
on a set date.
Deficit
A financial situation for an individual, company or government
where expenses exceed income.
Discount Brokers
Firms that offer lower commission rates than investment
dealers, but do not offer the services that investment dealers
do, such as advice, research and portfolio planning.
Diversification
Spreading investment to reduce risk by buying different
securities from various companies, businesses, locations
and governments.
E
EPS
EPS ratios Earnings per Share = Portion of a company's profit
allocated to each outstanding share of common stock.
Equities
The stock, or ownership of shareholders in a company.
Estate Planning
The process of planning the transfer of all personal assets
at death to chosen beneficiaries.
Executor
The person(s) or institution named under a will to administer
an estate in accordance with the terms of the will. If the
will requires a trust to be established, rather than having
the assets distributed outright to the beneficiaries, the
executor will normally also be named as trustee.
F
Fee-Based Accounts
Client accounts in which the investment dealer does not
charge commissions, but charges a fee based on the value
of the investor's account instead.
Financial Planning
A process in which an individual sets long-term financial
goals through investments, tax planning, asset allocation,
risk management, retirement planning and estate planning.
Fixed Income Securities
Securities that generate a predictable stream of interest
or dividend income, such as bonds, debentures and preferred
shares.
G
Guaranteed Investment Certificates (GICs)
A deposit instrument most commonly available from trust
companies or banks requiring a minimum investment at a predetermined
rate of interest for a stated term, i.e. one year, five years,
etc. Generally non-redeemable and non-transferable prior
to maturity, but there can be exceptions.
I
Index or Average
A statistical tool that measures the state of the stock
market or the economy, based on the performance of stocks
or other meaningful components. Examples are the S&P/TSX
Composite Index, The Montreal Exchange Market Portfolio Index
and the Dow Jones Industrial Average.
Inter Vivos Trust
Also known as a living trust, inter vivos trusts are created
during the lifetime of the settlor.
Interest
Money charged by a lender to a borrower for the use of his
or her money.
Intestate
A person who dies without a will. A partial intestacy is
where a valid will does not dispose of the whole of the estate.
Investment
The purchase or ownership of a security to make money by
gaining income, increasing capital, or both. Investments
may also include artwork, antiques and real estate.
Investment Advisor
This is a person employed by an investment dealer who provides
investment advice to clients and executes trades on their
behalf in securities and other investment products. Investment
advisors must attain set educational qualifications, follow
certain rules and regulations and be registered by the securities
commission in the province in which he or she works.
Investment Counsellor
A specialist in the investment industry paid by fee to provide
advice and research to investors with larger sized accounts.
Investment Objective
Investment Objective is determined by your financial goals,
time horizon, level of investment risk, and tax considerations.
Once identified, your investment objective becomes a long-term
action plan that includes a target mix of equities, bonds,
and other securities.
Investment Policy Statement
Investment Policy Statement is the core of your investment
strategy. It embodies your current financial situation, what
you hope to achieve in the future, and your attitude toward
risk. It is your assurance that your assets will be prudently
managed, in keeping with your expressed goals and objectives.
Investment services representatives
An investment services representative is registered with the IIROC
and licensed to receive and act upon client trading instructions. He/she
does not provide advice or investment recommendations.
L
Liabilities
These are the debts and obligations of a company. Current
liabilities are debts due and payable within one year. Long-term
liabilities are those payable after one year. Liabilities
are found on a company's balance sheet.
Life Annuity
A contract which guarantees the planholder a regular monthly
income for life in exchange for an amount of money in a Registered
Retirement Savings Plan (RRSP).
M
Managed Account
This is similar to a discretionary account where a client
has given specific written authorization to a partner, director
or qualified portfolio manager of an investment dealer to
select securities and execute trades, but on a continuing
basis and for a fee. Managed accounts can be solicited whereas
discretionary accounts are opened as a matter of convenience
to clients who are ill or out of the country.
Margin Account
A client account where he or she uses credit from the investment
dealer to buy a security. The client needs to deposit a "margin" amount
with the balance being advanced by the investment dealer
against acceptable collateral such as investments. The investment
dealer can make a "margin call" and demand that the client
deposit more money or securities when the value of the account
falls below a certain level. If the client does not meet
the margin call, the dealer can sell the securities in the
margin account at a possible loss to cover the balance owed.
The client is also charged interest on the money borrowed
from the investment dealer for the purchase of the securities.
Money Manager
The person who is responsible for a portfolio of securities.
In return for a fee, the manager has the fiduciary responsibility
to manage the assets prudently and choose which asset types
are most appropriate over time.
Money Market
That part of the capital market in which short-term financial
obligations are bought and sold. These include federal government
treasury bills, short term Government of Canada bonds, commercial
paper, bankers' acceptances and guaranteed investment certificates.
Longer term securities, when their term shortens to three
years, are also traded in the money market.
Mutual Funds
These are open-end funds that are not listed for trading
on a stock exchange and are issued by companies which use
their capital to invest in other companies. Mutual funds
sell their own new shares to investors and buy back their
old shares upon redemption. Capitalization is not fixed and
normally shares are issued as people want them.
N
Net Worth
The difference between a company's total assets less its
total liabilities. Also referred to as shareholders' equity.
O
Option
An investor who purchases an option has the right, but not
the obligation, to buy or sell certain securities at a specified
price within a specified time. A put option gives the holder
the right to sell the security, a call option gives the right
to buy the security.
P
PE
Price of a stock divided by earnings per share.
Portfolio
The entire combination of securities or investments an individual
or institution holds. A portfolio can contain a variety of
government and company bonds, preferred and common stocks
from different businesses and other types of securities and
assets.
Portfolio Management
The process of managing money, including investments, budgeting,
banking and taxes.
Preferred Stocks or Shares
A class of stock that entitles the owners to a stated dollar
value per share in liquidation (paid after bondholders) and
a fixed dividend paid ahead of the company's common shares.
Preferred shares usually only have voting rights when a stated
number of dividends have been missed. Preferred shares are
generally considered income investments.
Probate of Will
Formal proof before the proper officer or court that the
will offered is the last will of the testor and confirming
the executor(s) named.
R
Registered Pension Plan (RPP)
A RPP is a trust registered with Revenue Canada and established
by a company to provide pension benefits for its employees
when they retire. Both employee and employer contributions
to the plan are tax deductible.
Registered Representative
Now more commonly referred to as an investment advisor.
This is a person employed by an investment dealer who provides
investment advice to clients and executes trades on their
behalf in securities and other investment products. Investment
advisors must attain set educational qualifications, follow
certain rules and regulations and be registered by the securities
commission of the province in which he or she works.
Registered Retirement Income Fund (RRIF)
A RRIF is a tax deferral vehicle available to Registered
Retirement Savings Plan (RRSP) holders who de-register their
plans. The plan holder invests the withdrawn RRSP funds in
the RRIF and each year must withdraw and pay income tax on
a set fraction of the total assets in the fund.
Registered Retirement Savings Plan (RRSP)
A vehicle available to individuals to defer tax on a specified
amount of money to be used for retirement. The holder invests
money in one or more of a variety of investment vehicles
which are held in trust under the plan. Income tax is deferred
until the money (the amount originally deposited plus any
interest or dividends made on that money) is withdrawn at
retirement. RRSPs can be converted into Registered Retirement
Income Funds.
S
Securities
Transferable certificates of ownership of investment products
such as notes, bonds, stocks, futures contracts and options.
Self Directed
Traditionally a client who manages a brokerage account with
no outside assistance. Self Directed accounts have access
to all of the traditional brokerage products and services
but with less fees.
Shares or Stocks
These two terms are used interchangeably. Certificates representing
ownership in a corporation and the appropriate claim on the
corporation's earnings and assets.
T
Tax Bracket
Although income tax is paid by most wage or income earners,
the rate of income tax paid increases as income exceeds certain
amounts, called brackets.
Tax Credit
Tax credits reduce taxes payable to the same extent for
all taxpayers, regardless of their income level and marginal
tax rate. Deductions from taxable income, however, are more
valuable as your income and tax rate increases.
Tax Shelter
This is an investment that offers tax savings in some form,
such as immediate deductions, credits or income deferral.
T-Bill
Common term for a government treasury bill, which is a short-term
government debt issue.
Testamentary Trust
A trust set up in a will that only takes effect after death.
Time Horizon
Time Horizon is the time span of your investment objectives.
Your time horizon dictates the types of investments that
are suitable for your portfolio. The shorter the time horizon,
the less appropriate are equities, or any other asset class
with high return variations. Conversely, the longer the time
horizon, the more an investor can afford a higher return
variation and thus a higher allocation to equities.
Trust
A legal arrangement in which one person (the settlor) transfers
legal title to a trustee (a fiduciary) to manage the property
for the benefit of a person or institution (the beneficiaries).
Trustee
The person or corporate trustee who takes legal title to
the trust property and who is required to follow the terms
of the trust. The trustee may be a trust company or an individual.
Often settlors will name joint or co-trustees, with a trust
company managing the property and dealing with the various
legal requirements, while an individual advises on discretionary
matters on the distribution of funds. Co-trustees have equal
authority.
W
Will
A legal document, prepared by a person in compliance with
formal requirements, which takes effect on his/her death
and which states what he/she wants to happen to his/her property
on death.
Wrap Account
A type of fully discretionary account (in which a client
has given specific written authorization to a partner, director
or qualified portfolio manager of an investment dealer to
select securities and execute trades for him or her). A single
annual fee, based on the account's total assets, is charged
instead of commissions and service charges being levied separately
for each transaction. The account is then managed separately
from all other wrap accounts, but is kept consistent with
a model portfolio suitable to clients with similar objectives.
This is also known as a wrap fee program.
Y
Yield
This is the measure of the return on an investment and is
shown as a percentage. A stock yield is calculated by dividing
the annual dividend by the current market price of the stock.
For example, a stock selling at $50 and with an annual dividend
of $5.00 per share yields 10%. A bond yield is a more complicated
calculation, involving annual interest payments plus amortizing
the difference between its current market price and par value
over the life of the bond.
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