Investing 101

Taking the mystery out of the language of investing

Investing comes with its own vocabulary. There are the more common phrases and words – bull and bear market – to name just two. Then there are words like diversification, that when applied to investing, often leaves us wondering. And of course there’s also a raft of financial products to understand. To help you decipher the language of investing we’ve included this glossary of terms from the Investment Funds Institute of Canada. For a complete list please click here.

Accumulation plan
An arrangement which enables an investor to purchase mutual fund shares regularly in large or small amounts.

Annual Report
A financial report sent yearly to a publicly held firm's shareholders. This report must be audited by independent auditors.

Annuitant
An individual who purchases an annuity and will receive payments from that annuity.

Annuity
A contract that guarantees a series of payments in exchange for a lump sum investment.

Ask price
A proposal to sell a specific quantity of securities at a named price.

Assets
What a firm or individual owns.

Back-end load
A sales charge levied when mutual fund units are redeemed.

Balance sheet
A financial statement showing the nature and amount of a company's assets, liabilities and shareholders' equity.

Balanced fund
A mutual fund which has an investment policy of "balancing" its portfolio generally by including bonds and shares in varying proportions influenced by the fund's investment outlook.

Bank Rate
The rate at which the Bank of Canada makes short-term loans to chartered banks and other financial institutions, and the benchmark for prime rates set by financial institutions.

Bear market
A declining financial market.

Blue chip
A descriptive term usually applied to high grade equity securities.

Bond
A long-term debt instrument with the promise to pay a specified amount of interest and to return the principal amount on a specified maturity date.

Bond fund
A mutual fund whose portfolio consists primarily of bonds.

Book value
The value of net assets that belong to a company's shareholders, as stated on the balance sheet.

Broker
An agent who handles the public's orders to buy and sell securities, commodities, or other property. A commission is generally charged for this service.

Bull market
An advancing financial market.

Buying on margin
Purchasing a security partly with borrowed money.

Cash equivalent
Assets that can be quickly converted to cash. These include receivables, Treasury bills, short-term commercial paper and short-term municipal and corporate bonds and notes.

Closed-end fund
A fund company that issues a fixed number of shares. Its shares are not redeemable, but are bought and sold on stock exchanges or the over-the-counter market.

Common stock
A security representing ownership of a corporation's assets. Voting rights are normally accorded to holders of common stock.

Compounding
The process by which income is earned on income that has previously been earned. The end value of the investment includes both the original amount invested and the reinvested income.

Consumer price index
A statistical device that measures the change in the cost of living for consumers. It is used to illustrate the extent that prices have risen or the amount of inflation that has taken place.

Coupon rate
The annual interest rate of a bond.

Current yield
The annual rate of return that an investor purchasing a security at its market price would realize. This is the annual income from a security divided by the current price of the security. It is also known as the return on investment.

Custodian
A financial institution, usually a bank or trust company, that holds a mutual fund's securities and cash in safekeeping.

Debenture
A bond unsecured by any pledge of property. It is supported by the general credit of the issuing corporation.

Debt
An obligation to repay a sum of principal, plus interest. In corporate terms, debt often refers to bonds or similar securities.

Distributions
Payments to investors by a mutual fund from income or from profit realized from sales of securities.

Diversification
The investment in a number of different securities. This reduces the risks inherent in investing. Diversification may be among types of securities, companies, industries or geographic locations.

Dividend
A per-share payment designated by a company's board of directors to be distributed among shareholders. For preferred shares, it is generally a fixed amount. For common shares, the dividend varies with the fortunes of the company and the amount of cash on hand. It may be omitted if business is poor or the directors withhold earnings to invest in plant and equipment.

Dividend fund
A mutual fund that invests in common shares of senior Canadian corporations with a history of regular dividend payments at above average rates, as well as preferred shares.

Dividend tax credit
An income tax credit available to investors who earn dividend income through investments in the shares of Canadian Corporations.

Dollar cost averaging
A principle of investing which entails the use of equal amounts for investment at regular intervals in the hope of reducing average share cost by acquiring more shares in periods of lower securities prices and fewer shares in periods of higher securities prices.

Earned income
For tax purposes, earned income is generally the money made by an individual from employment. It also includes some taxable benefits. Earned income is used as the basis for calculating RRSP maximum contribution limits.

Earnings statement
A financial statement showing the income and expenses of a business over a period of time. Also known as an income statement or profit and loss statement.

Equity
The net worth of a company. This represents the ownership interest of the shareholders (common and preferred) of a company. For this reason, shares are often known as equities.

Equity fund
A mutual fund whose portfolio consists primarily of common stocks.

Face value
The principal amount, or value at maturity, of a debt obligation. Also known as the par value or denomination.

Fair market value
The price a willing buyer would pay a willing seller if neither was under any compulsion to buy or sell. The standard at which property is valued for a deemed disposition.
pursued by government to manage the economy through its spending and taxation powers.

Fixed income investments
Investments that generate a fixed amount of income that does not vary over the life of the investment.

Front-end load
A sales charge levied on the purchase of mutual fund units.

Fundamental analysis
A method of evaluating the future prospects of a company by analyzing its financial statements. It may also involve interviewing the management of the company.

Growth stocks
Shares of companies whose earnings are expected to increase at an above-average rate. Growth stocks are often typified by their low yields and relatively high price/earnings rations. Their prices reflect investors' belief in their future earnings in growth.

Guaranteed investment certificates
A deposit instrument paying a predetermined rate of interest for a specified term, available from banks, trust companies and other financial institutions.

Income funds
Mutual funds that invest primarily in fixed-income securities such as bonds, mortgages and preferred shares. Their primary objective is to produce income for investors, while preserving capital.

Index fund
A mutual fund that matches its portfolio to that of a specific financial market index, with the objective of duplicating the general performance of the market in which it invests.

Inflation
A condition of increasing prices. In Canada, inflation is generally measured by the Consumer Price Index.

Interest
Payments made by a borrower to a lender for the use of the lender's money. A corporation pays interest on bonds to its bondholders.

International fund
A mutual fund that invests in securities of a number of countries.

Investment adviser
Investment counsel to a mutual fund. Also may be the manager of a mutual fund.

Investment company
Investment dealer
A securities firm.

Investment fund
A term generally interchangeable with "mutual fund."

Investment Funds Institute of Canada (IFIC)
The mutual fund industry trade association set up to serve its members, co-operate with regulatory bodies, and protect the interests of the investing public that use mutual funds as a medium for their investments.

Leverage
The financial advantage of an investment that controls property of greater value than the cash invested. Leverage is usually achieved through the use of borrowed money.

Life annuity
An annuity under which payments are guaranteed for the life of the annuitant.

Life expectancy adjusted withdrawal plan
A plan through which a mutual fund investor's holdings are fully depleted while providing maximum

periodic income over the investor's lifetime.

Load
Commissions charged to holders of mutual fund units. (See sales charge.)

Management company
The entity within a mutual fund complex responsible for the investment of the fund's portfolio and/or the administration of the fund. It is compensated on a percentage of the fund's total assets.

Management expense ratio
A measure of the total costs of operating a fund as a percentage of average total assets.

Management fee
The sum paid to the investment company's adviser or manager for supervising its portfolio and administering its operations.

Marginal tax rate
The rate of tax on the last dollar of taxable income.
The date at which a loan or bond or debenture comes due and must be redeemed or paid off.

Money market
A sector of the capital market where short term obligations such as Treasury bills, commercial paper and bankers' acceptances are bought and sold.

Money market fund
A type of mutual fund that invests primarily in treasury bills and other low-risk, short-term investments.

Mortgage fund
A mutual fund that invests in mortgages. Portfolios of mortgage funds usually consist of first mortgages on Canadian residential property, although some funds alsoinvest in commercial mortgages.

Mutual fund
An investment entity that pools shareholder or unitholder funds and invests in various securities. The units or shares are redeemable by the fund on demand by the investor. The value of the underlying assets of the fund influences the current price of units.

Net asset value
The value of all the holdings of a mutual fund, less the fund's liabilities.

Net asset value per share
Net asset value of a mutual fund divided by the number of shares or units outstanding. This represents the base value of a share of unit of a fund and is commonly abbreviated to NAVPS.

No-load fund
A mutual fund that does not charge a fee for buying or selling its shares.

Open-end fund
An open-end mutual fund continuously issues and redeems units, so the number of units outstanding varies from day to day. Most mutual funds are open-ended.

Pension plan
A formal arrangement through which the employer, and in most cases the employee, contribute to a fund to provide the employee with a lifetime income after retirement.

Preferred share
An ownership security, senior to the common stock of a corporation, with preferred claim on assets in case of liquidation and a specified annual dividend.

Premium
The amount by which a bond's selling price exceeds its face value. Also, the amounts paid to keep an insurance policy in force.

Price earnings ratio
The market price of a common share divided by its earnings per share for 12 months.

Principal
The person for whom a broker executes an order, or a dealer buying or selling for his or her own account. Also, an individual's capital or the face amount of a bond.

Prospectus
The document by which a corporation or other legal entity offers a new issue of securities to the public.

Real estate fund
A mutual fund that invests primarily in residential and/or commercial real estate to produce income and

capital gains for its unitholders.

Real estate investment trust
A closed-end investment company that specializes in real estate or mortgage investments.

Registered Education Savings Plan (RESP)
A plan that enables a contributor, on a tax deferral basis, to accumulate assets on behalf of a beneficiary to pay for a post secondary education.

Registered Retirement Income Fund (RRIF)
A maturity option available for RRSP assets to provide a stream of income at retirement.

Registered Retirement Savings Plan (RRSP)
A retirement savings plan to hold amounts deducted from taxable income, within certain limits, in a tax deferred state. There are various investment options and a tax deferral on investment income and gains. Available to individuals to and including 69 years of age, but must be collapsed by the end of the year in which the holder turns 69 years of age.

Rights
Options granted to shareholders to purchase additional shares directly from the company concerned. Rights are issued to shareholders in proportion to the securities they may hold in a company.

Risk
The possibility of loss; the uncertainty of future returns.

Sales charge
In the case of mutual funds, these are commissions charged to holder of fund units, usually based on the purchase or redemption price. Sales charges are also known as "loads."

Securities Act
Provincial legislation regulating the underwriting, distribution and sale of securities.

Shares
A document signifying part ownership in a company. The terms "share" and "stock" are often used interchangeably.

Shareholders' equity
The amount of a corporation's assets belonging to its shareholders (both common and preferred) after allowance for any prior claim.

Short selling
The sale of a security made by an investor who does not own the security. The short sale is made in expectation of a decline in the price of a security, which would allow the investor to then purchase the shares at a lower price in order to deliver the securities earlier sold short.

Specialty fund
A mutual fund that concentrates its investments on a specific industrial or economic sector or a defined geographical area.

Spread
The difference between the rates at which money is deposited in a financial institution and the higher rates at which the money is lent out. Also, the difference between the bid and ask price for a security.

Stock options
Rights to purchase a corporation's stock at a specified price.

Strip bonds
The capital portion of a bond from which the coupons have been stripped. The holder of the strip bond is entitled to its par value at maturity, but not the annual interest payments.

Systematic withdrawal plan
Plans offered by mutual fund companies that allow unitholders to receive payment from their investment at regular intervals.

Tax credit
An income tax credit that directly reduces theamount of income tax paid by offsetting other income tax liabilities.

Tax deduction
A reduction of total income before the amount of income tax payable is calculated.

Term insurance
Temporary life insurance that covers the policyholder for a specific time.

Term to 90 annuity
An annuity that pays a fixed amount each year until it is exhausted in the year that the annuitant turns 90.

Trade
A securities transaction.

Treasury bill (T-bill)
Short-term government debt. Treasury bills bear no interest, but are sold at a discount. The difference between the discount price and par value is the return to be received by the investor.

Trust
An instrument placing ownership of property in the name of one person, called a trustee, to be held by the trustee for the use and benefit of some other person.

Unit trust
An unincorporated fund whose organizational structure permits the conduit treatment of income realized by the fund.

Universal life insurance
A life insurance term policy that is renewed each year and which has both an insurance component and an investment component. The investment component invests excess premiums and generates returns to the policyholder.

Variable life annuity
An annuity providing a fluctuating level of payments, depending on the performance of its underlying investments.

Warrant
Certificates allowing the holder the opportunity to buy shares in a company at a stated price over a specified period. Warrants are usually issued in conjunction with a new issue of bonds, preferred shares or common shares.

Wrap account
An account offered by investment dealers whereby investors are charged an annual management fee based on the value of invested assets.

Yield
Annual rate of return received on investments, usually expressed as a percentage of the market price of the security.

Yield curve
A graphic representation of the relationship among yields of similar bonds of differing maturities.

Yield to maturity
The annual rate of return an investor would receive if a bond were held until maturity.