The Money Dictionary
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Accrued InterestInterest that has been earned but not yet paid out to the investor. This interest must be declared each year as income for tax purposes even if it has not been received. The price you pay to buy something � a sales commission. Professional analysts who calculate mortality rates and life expectancy for insurance purposes. Besides the meanings of this word we may be familiar with, as in, a person or institution who administers, an administrator of an estate is someone appointed by the court to handle the duties normally fulfilled by an executor when we die without a will, or when the will fails to name an executor. The cost to an investor after calculating the effect of income tax The process of gradually paying out debt or obligation, e.g. a mortgage, or of ‘writing off’ value for tax or reporting purposes. For instance, costs that are incurred to purchase long term benefits are amortised for tax purposes. If a company does a share offering to raise capital that it will use over a ten year period, the costs of doing the share offering will be amortised over that period, with a portion declared as a taxable cost of doing business in each year. A financial professional, usually employed by a bank, brokerage firm, or mutual fund company, who studies companies and/or markets and makes buy and sell recommendations. Analysts are often specialists — they focus on bonds, for instance, or Asian equities. A report issued by a company to its shareholders containing reports on the company operations and the financial statements for the period reported. A contract under which assets are turned over to an institution (usually an insurance corporation) on the condition that a stream of income will be provided for a specified period. Life annuities pay for the lifetime of the ‘annuitant’ (the person receiving the payments) and fixed term annuities for a fixed period of time, generally until the annuitant reaches age 90. Annuities can also be deferred (payments are scheduled to begin at some point in the future) or immediate, in which payments are scheduled to begin immediately. An estimate of the potential selling price of an asset, usually property In financial terms, anything you own that has value The planned distribution (or ‘allocation’) of investment assets (by percentage) into various categories e.g. equities (stocks or equity mutual funds), bonds (or fixed income funds), liquid investments (T-Bills, term deposits, money market funds) according to pre-determined criteria. There are two primary types of asset allocation: strategic and tactical. Strategic asset allocation measures an investor’s risk tolerance, objectives, and needs, in order to design an appropriate portfolio. Examples are the Mackenzie Star Program and the Keystone Program. Tactical asset allocation is a kind of institutionalised market timing (see market timing). In our opinion, not a good thing Averages and Indices (or Stock Market Index) The DOW Jones Industrial Average (commonly known as the DOW) is one, the TSX 60 Composite Index is one. These are tools of statistical measurement, in which a basket of representative companies is used to determine the overall gain or loss of a market. In the TSX 60, for instance, the Toronto Stock Exchange performance is measured by recording the price changes of the 60 representative companies stocks. When comparing performances of investment vehicles or categories, an Average is a weighted comparison, that is, the performance of large funds or companies will impact the measurement more than that of smaller funds or companies. A median, on the other hand, is the mid-point: half of all funds or investments did better, half did worse. The process of buying more of a security for which the market value has declined in order to lower the average per-share or per-unit cost of the holding.
B
Back-End LoadA mutual fund sales charge that is paid to the financial advisor out of the fund itself, unless the investor redeems prior to the end of a stated holding period, in which case a redemption penalty is levied. The penalty is applied on a sliding scale, generally beginning at 5.5% in the first year and declining to approximately 2% by year five. The holding period is usually 6-7 years. (See ‘free units’) A large, lump sum payment due at the end of a stated term. Usually used in reference to mortgages, bonds, and debentures. This is the rate at which the Bank of Canada makes short term loans to Canada’s chartered banks. Basis Point (also referred to as BPs or ‘Beeps’) You will probably hear this in reference to bond and T-Bill purchases. It means, simply, 1/100th of 1 percent. A term used to describe a declining market. A ‘bearish’ analyst is one that believes the market will decline. The individual or institution that really owns the asset. If Gloria Steinem was Canadian and had a self-directed RSP with ABC Trust, for instance, in which she owned mutual funds, the mutual fund account will be registered to ABC Trust in Trust For Gloria Steinem A/c #123456-7. Gloria would be the beneficial owner, and ABC Trust would be the registered owner. The person or persons chosen to receive the benefit of income or assets under the terms of a investment, trust, insurance policy or estate The price a buyer offers to pay for a trading security or asset A loan payment that consists of a partial payment on the principal of the loan (the amount of money you actually borrowed) and the interest charged on the loan Stocks with good investment qualities. They are usually common shares of well-established, dividend paying companies with good earnings histories. These companies are also invariably ‘large-cap’ or large capital, meaning that they have a market capitalisation (value of shares outstanding) of $100,000,000 or more. The minimum number of shares that may be purchased without incurring additional commission. A purchase of shares that is less than a board lot is an odd lot. A debt instrument issued by a government or corporation in order to raise working capital. A bond is a promise (or ‘covenant’) by the issuing government or corporation to repay the principal amount (amount purchased) on the maturity date plus interest payments on a stated schedule. (Buyer beware:a 9% bond will not necessary yield 9% to the investor. In low interest rate environments, an owner of a 9% bond would not sell it without receiving a premium to compensate for the loss in income. That is, a $1000, 9% bond might be sold, and purchased, for $1070 (a $70 premium). Therefore, the yield to maturity (let’s assume the bond matures in one year) would be $1000 X 9% = $1090 - $70 (premium) for a real yield of $20, or 2%.) (See debenture, diversification and discount) This term is usually used to describe the purchase price, plus reinvested dividends, of investments within an RSP. Book value can also be the market value at the time an asset is transferred or contributed to an RSP. Book Value is used to calculate maximum foreign content holdings. At present, foreign content is generally limited to 20% of book value, that is, 20% of the purchase amount of your assets plus any reinvested dividends. In the stock market, or when analyzing companies, the term book value is used in reference to the worth of a company, the net assets belonging to the owners of the business as reported in the balance sheet. An agent who sells and buys securities on behalf of a third party. Usually used in reference to an agent who buys and sells stocks, an agent that sells a range of insurance products, or an agent that sells real estate. The opposite of a bear market –a market in which prices are increasing.
C CallableThis is a feature of some bonds or preferred stocks that allow the issuer to redeem (�call�) the bond or stock prior to the stated maturity date at a pre-stated price Canada Mortgage and Housing Corporation (CMHC) This Crown corporation was formed for the purpose of making home ownership available to a larger number of Canadians by administering the National Housing Act and making mortgage insurance products available. Webfind http//www.cmhc-schl.gc.ca/ This organization does a good job of providing publications on everything we need to know about money � and they are all available free of charge, just for the asking. Visit the “Publications” are of their website, or call 1-800-263-0231. Webfind http://www.cba.ca/eng/index.cfm Canadian Bond Rating Service (CBRS) An independent evaluator of the underlying credit worthiness (corporate �credit rating�). Ratings range from P1 (highest) to P5 (lowest). There are other bond rating evaluators such as Standard and Poor�s and Moody�s Canadian Depository Insurance Corporation A crown corporation formed for the protection of investors in Canada�s banks and trust companies. Under CDIC, to which all banks and trust companies pay premiums, an investor is covered to a maximum of $60,000 (on principal deposits only�interest is not included) should a member firm become bankrupt. Webfind http//www.cdic.ca/english/index.htm Canadian Investor Protection Fund (CIPF) A fund created by the stock exchanges and the Investment Dealers Association to protect investors from losses resulting from the bankruptcy of a member firm. All stock brokerage firms in Canada must be a �member firm�, however, securities and mutual fund dealers are not members of the IDA and their clients are not covered by this fund. A stock brokerage firm is a member of an exchange, and although they may sell mutual funds, GICs, etc., their primary business is the trading of stocks and bonds. Webfind http//www.cipf.ca/ Securities Dealers are licensed through their provincial securities commission (e.g., the BC Securities Commission) to sell mutual funds and certain securities not traded on an exchange. They may offer these products through a liaison with a member firm. Mutual Fund Dealers are licensed through their provincial securities commission to sell mutual funds only. Again, they may offer other products through institutional liaisons. Canada Education Savings Grant (CESG) A grant issued by the federal government to top up education savings contributions. See the chapter on education planning. Webfind http//www.hrdc-drhc.gc.ca/hrib/learnlit/cesg/menu/home.shtml Canada Pension Plan (CPP) For information specific to your situation, call the CPP hotline or visit them on the web @ http.//www.hrdc-drhc.gc.ca/isp/common/home.shtml Capital Cost Allowance An Income Tax Act term used to describe deductions allowed from the value of certain assets, which are then treated as expenses from an individual�s or company�s income. Capital Gain A profit made on an asset when the selling price is higher than the purchase price on �capital assets� such as stocks, real estate, and bonds. To encourage investment in Canada, Revenue Canada taxes capital gains more favourably than other income. We pay tax at our regular rate, but on only 66% of the capital gain. We can also use any capital losses to offset taxable capital gains. Unfortunately, capital losses cannot be used to offset other types of income. Capital Loss The opposite of a capital gain�see above. Capitalisation Total amount of all outstanding debt, common and preferred stock, contributed surplus, and retained earnings of a company. Is also sometimes shown as a percentage. Carry-forward The difference between an individual�s maximum RRSP contribution limit and the amount they have actually contributed. Currently, carry-forward amounts may be carried-forward indefinitely, but this is subject to the whims of the Finance Minister. Cash and ‘Cash Equivalents’ We all know the most common definition — money in our pocket! However, the term is also used to refer to that portion of our savings or investment portfolio that earns interest and will never go below our original investment value. In many cases, ‘cash equivalents’ can be accessed at short notice. Examples are money market funds, high interest savings accounts, Canada Savings Bonds, provincial savings bonds, T-bills, and GICs. Cash Account A brokerage account in which the account holder pays the full amount for any investments purchase. (The alternative is a margin account, which is an account that allows the account holder to buy on credit within certain limitations.) Cash Flow For individuals, all income that is received in cash (or cash value), and all expenses paid in cash (or cash value). For corporations, all earnings plus all deductions that are not paid out in cash such as depreciation and deferred income taxes. Certificate of Deposit (CD) More commonly called a term deposit�a deposit of funds that becomes available on a stated maturity date. A more common term in the US�we usually call these term deposits (if they mature within one year) or GICs. Certified Financial Planner (CFP) Someone who has met the training and testing requirements of the Financial Planners Standards Council of Canada or the Canadian Institute of Financial Planning. Although both organisations do investigate complaints against their members, and do purport to uphold a standard of ethics, neither has any real regulatory power. In addition, there is a huge difference between upholding the law and holding one�s members to truly ethical behavior. In other words, do not assume someone that holds the CFP designation has your best interests at heart. Closed Mortgage Unlike most loans, if you repay or renegotiate a closed mortgage ahead of schedule, you must pay an interest penalty, often the equivalent of three month�s interest. Closing Date When buying a home, this is the date on which the sale becomes final and the new owner gets to move in. Class A & B Stock In most cases, class A refers to preferred stock, and class B refers to common stock. This is usually but not always the case, so it is important to ask the difference. Codicil A written change, amendment, or addition to a will which has been properly witnessed and signed. This is often an efficient way of making a change to a will without having the entire document rewritten. Collateral Property, securities, or assets pledged as security against a loan. Commercial Paper Short-term (less than one year), unsecured promissory notes issued by corporations to finance short-term cash flow requirements. Commission The broker or agent�s fee for buying or selling securities for a third party. Commodity A product used for commerce that is traded on an exchange. Commodities include agricultural products like wheat (and pork-bellies!) or natural resources like oil and gold. Common Share A type of stock that represents ownership or �equity� in a company. Common shares often include the right to vote in the company�s affairs and entitle the shareholder to participate in a share of the company�s profits, usually paid out through dividends. Community Property A legal term that describes property (assets) acquired after marriage that is jointly shared by both partners. (Sometimes referred to as �family property�.) Compound Returns The magic of compounding! This means that interest, or returns, are earned on the principle amount invested plus any formerly earned interest or returns on the investment. As Martha Stewart says, “This is a good thing.” Unfortunately, it also works in reverse, on debt. Therefore, you pay interest (on a credit card, for instance) not only on the amount that you initially spent or borrowed, but on the principle plus interest that has been charged to you in the past. A bad thing. Conditional Offer When buying a home, a conditional offer is one that is (rather obviously, I�m afraid) contingent on certain requirements. Common conditions include the completion of a satisfactory appraisal, or that the purchase will only take place if the buyer�s current home sells within a certain period Confirmation A printed acknowledgement of a purchase or sale of stocks, bond, or mutual fund units. These are normally mailed to an investor within 24 hours of a trade, and give all the details of the purchase or sale (price, number of shares or units, and commission). They are issued either by the brokerage firm or the investment dealer. Confirmations are also referred to as contracts. Constrained Share Companies These are companies whose ownership is restricted to Canadian citizens. They include banks, broadcasting and communications companies, and trust and insurance companies. Consumer Price Index A statistical measurement of increases or decreases in the cost of living. A basket of goods (housing, gas, the price of milk, etc.) is measured on a regular basis. This is generally the way that inflation is measured. Contribution The amount you put into something, generally used in reference to an investment or savings plan such as an RESP (registered education savings plan) or an RRSP (registered retirement savings plan) Conventional Mortgage A mortgage that does not exceed 75% of the property�s appraised value � that is, a mortgage on a home on which the buyer has made a down payment of at least 25% of the value. The alternative is a high-ratio mortgage, which must be insured by CMHC prior to funding. Convertible A feature of a security (generally a bond, debenture or preferred share) that allows the investor to �convert� the asset into another asset, generally a common share, according to pre-stated conditions. Convertible term insurance Term insurance that can be converted to a permanent or �whole life� policy without evidence of insurability (medical examinations, etc.) Coupon A bond attachment (coupon) that can be clipped and presented to a bank on or after the maturity date. The coupon entitles the bearer to an interest payment. The coupon rate is the rate of interest paid on the bond. A strip bond is a term that refers to a bond stripped of its coupons and sold separately. Covenant A promise to do something, or not to do something, as set out in a contract or bond offering. An example might be a covenant to not issue further bond issues. Cum-dividend Means that the investor purchasing the share will also receive the dividend that is about to be paid out�the opposite of ex-dividend. Cumulative Preferred This term means that if a company misses a dividend to its preferred shareholder, they must make up this payment before paying dividends to common shareholders. Current Yield The annual return on an investment CUSIP An industry term used to refer to the six digit identifying number on stock certificates. Cyclical stock A stock of a company that is especially sensitive to changes in economic conditions. A cyclical stock would be considered an aggressive or �volatile� investment, and should only be purchased with professional advice, with less than 10% of a balanced portfolio, and with an investment time horizon of more than ten years.
D Day Order An order to buy or sell a security that becomes void if not filled by the end of that day. Debenture An unsecured bond, or debt instrument. At one time, bonds were always �securitized� (or backed) by the underlying assets of the corporation issuing them. A debenture is a bond that is not back by underlying assets. This definition has become somewhat mongrelised with the advent of �junk bonds� in which the underlying assets were worth mere fractions of the value of the bond issue. When purchasing a bond, an important question is always “What is the present and future value of the underlying assets securitizing the bond issuing?” Decreasing term insurance With this insurance policy, the premium remains constant while the coverage diminishes over time, decreasing the overall premium of the coverage. Deemed Disposition A term used by Revenue Canada to refer to those circumstances that result in an asset being treated, for tax purposes, as if it has been sold. This occurs when an asset is transferred to another individual (i.e., a spouse), contributed or swapped into an RSP, upon death, or upon immigration from Canada. Deferred Annuity Annuities for which income payments begin after a period of time, usually at a stated age. For instance, one might purchase an annuity with the proceeds of a pension plan on early retirement at age 55 and defer receipt of the proceeds until age 69. Deferred Sales Charge (DSC) A commission that is paid by the investment company rather than as a percentage of your initial investment. One way or another, you pay � but with a deferred sales charge, the commission is viewed as an expense of the fund itself rather than coming directly out of your pocket. In addition, if you take your money out of that family of funds prior to the required period, you will be faced with a hefty penalty. See also Front End Load Deferred Profit Sharing Plan (DPSP) Your employer can contribute a portion of its profits into this tax-sheltered plan for your benefit. Until you retire and start withdrawing the money, it can grow unravaged by taxes. There are many limits and restrictions, of course � see the chapter on retirement planning. Defined Benefit Plan (DPP) A company or institution sponsored pension plan in which retirement benefits are usually determined by a complex formula based on salary, and years of service. The benefits are therefore �defined�; the pension holder knows, or can calculate, what the payments will be in advance. Most pension plans in Canada are defined benefit plans. DPPs may also be contributory (which means that both the employee and employer contribute) or (rarely) non-contributory in which the employer makes all contributions on the employees behalf. Defined Contribution Plan See Money Purchase Plan Discount Well, we all know what this is! However, in the financial industry, �discount� generally refers to the amount a bond or debenture sells below �par� value�that is, its stated face value. For instance, a bond worth $100 with an interest rate of 3% would trade at a discount to make it attractive to potential purchasers if interest rates (for the same term) were 5%. Therefore, the price might be $87 for $100 of bond value, for a discount of $13/$100. The opposite of a discount is a �premium�. If the bond being offered for sale paid interest of 6% during a period when bonds of the same maturity term generally paid 3%, a potential buyer would be willing to pay a �premium�. Therefore, a $100 bond might be sold for $107, or a premium of $7/$100. Diversification Otherwise known as “not keeping all of your eggs in one basket,” this may be the most important concept in investment and financial planning. There are many levels of diversification, all of which are intrinsically linked, but must be understood individually
Distribution The payment of a dividend, income, or capital gain Dividend A portion of a company�s (or mutual fund�s) profits paid out to shareholders (or unit holders). May be paid in cash (usually the case with stock) or in �kind� (more shares or units�usually the case with mutual funds). Dividend Reinvestment The term describing a process whereby dividends are paid in cash and then converted into shares or units of a company or fund (without the cash being distributed to the investor first). Some companies and most mutual funds provide this feature. Dividend Tax Credit System A tax procedure used to encourage Canadians to invest in Canadian corporations, and to reflect the fact that corporations have already paid tax on the profits they then pay out as dividends. Tax is calculated by �grossing up� (increasing) the amount of the dividend received by 25%. Federal tax is then calculated on this amount. Next, we apply a tax credit of 16.67% of the dividend received, and then calculate provincial tax. This doesn�t sound like it would be a good thing, but it generally is, resulting in more favourable tax treatment of dividend income than on employment or interest income. Dollar Cost Averaging A good thing! This describes the process of investing a specified (unchanging) amount on a regular basis. This process mitigates volatility risk by working against natural emotional reactions�that is, when prices are down, it feels �unnatural� to purchase more, even though logically (assuming the investment is sound) we know this to be a good strategy. When prices are up, it is always tempting to buy more, although logically, we understand that this is not a good �value�. Dollar cost averaging alleviates the negative effects of both of these natural emotional reactions. This process also lowers the average purchase price of shares or units, as the same amount buys more shares when the price is down. Market volatility then becomes a helpmate, rather than an anxiety producer.
E Earned IncomeA Revenue Canada term. Very loosely defined, this includes all income that is earned through employment or business. For most of us, �earned income� would be the amount of our gross salary. It also includes royalties, research grants, taxable alimony, maintenance & child support received, net rental income (rental income minus rental losses & costs) and disability pensions paid out under CPP/QPP. It does not include pension income, dividends, interest, capital gains, amounts received from an RSP/RRIF, severance pay, etc. For a complete definition of �earned income� refer to Revenue Canada�s information circular “72-22R9″. Webfind (Revenue Canada) http//www.ccra-adrc.gc.ca/menu-e.html Earnings A corporation�s revenues, minus the expenses incurred to create those revenues, over a stated period of time. Emergency Reserve Fund “Life is either a daring adventure … or it is nothing!” As profound a truth as that is, nothing can improve our feelings of financial well-being, and therefore, our ability to attract wealth, more than knowing we’ve prepared for the storms that will inevitably come. Whether it is something as innocuous as the transmission going on the car or as wrenching as losing a job we thought we had for life, an emergency reserve fund will ease the pain. In addition to the psychological benefits, having a savings reserve will save us from that destructer of financial well-being — consumer debt. When we get back on our feet, rather than paying high interest and struggling to pay down debt, we can enjoy the satisfaction of replenishing our reserve. Don’t let your emergency reserve lay around in a savings account. Invest in a high interest savings account, 30-day term deposits (short-term GICs), money market funds, or Canada Savings Bonds (not the Premium bonds, which can only be cashed once a year). It may take a few weeks to access your money (which is a good thing) so have a line of credit or a sufficient credit card limit to get you through the first few weeks. Be sure to pay off the balance as soon as receive your funds — you don’t need interest costs in a time of financial turmoil. Equities Estate All assets owned at the time of death. Estate Planning Planning to transfer one�s assets in an orderly manner to those one wishes to leave them to, in a way that minimizes taxes, delays, fees, and potential family discord. Excess contribution Any contribution made to an RSP over your maximum contribution limit. Until recently, you could over-contribute up to $8000 without penalty. That is, you could contribute an extra $8000 to your RSP without being penalised. If you over-contributed more than $8000, you were penalised 1% of the excess per month. Due to legislation changes, any over-contribution of more than $2000 is penalised at this rate. If you intend to keep the funds within your RSP for a long time (more than ten years) it can make sense to over-contribute to a maximum of $2000, even though you can�t make a deduction. The benefits of tax-sheltering the growth on income can be significant. If your circumstances are such that you can�t make your maximum contribution in a subsequent year, you can then deduct the over-contribution. Otherwise, plan to make the deduction in the year you turn 69, or it will be double-taxed�that is, taxed at source when you earn it, and taxed again as income when you withdraw it. Ex-Dividend A term used to describe a stock that is sold without its upcoming dividend. Also referred to as cum-dividend Executor The person or institution assigned to carry out the instructions of a will and distribute the property of the estate Extendible Bond or Debenture A debt instrument granting the holder the right to extend the maturity date by a stated period.
F Face ValueThe value of a bond or debenture that appears on its �face�, or the front of the certificate. This is usually the amount due on maturity. Investments on which earnings are known in advance, or ‘fixed’. They may or may not be ‘guaranteed’, which means that earnings are both known in advance and guaranteed, by CDIC, the Canada Deposit Insurance Corporation, for example, in the case of bank-issued GICs. Bonds and GICs are the most common type of fixed income investments, but bond and mortgage funds are also considered fixed income securities even though their value may fluctuate. See bond. Fixed Rate Mortgage A mortgage on which the interest rate and terms will stay the same for the term of the mortgage. The alternative is a variable rate mortgage, for which the rate will vary according the conditions of the period. Flow-Through Shares Certain losses and expenses that would normally be treated as tax deductions by a corporation or trust can be �flowed-through� or attributed to investors through these investment structures. Front End Load The term refers to a sales commission paid at the time of a mutual fund purchase. Sometimes referred to as a sales charge, or acquisition fee, this fee is charged on a percentage basis ranging from 0 to 9%, with an average of 3%-5%. There is heavy competition at the lower end, however, with many institutions selling at 1-2% and even lower on purchases of a minimum dollar amount. There are two alternatives to front-end load, no-load (no fee) and deferred sales charge, or back-end load. No load is obviously best. Deferred sales charges (or DSC) have taken the market by storm since they became available in the eighties. With a deferred sales charge, the Fund Company pays the sales commission on your behalf, but you must leave your investment with that family of funds for a stated period of time (usually 7 years). If you withdraw earlier, you will be charged a fee on a declining scale. (For example 6% in year one, 5% in year two, 4% in year three). This information is available in the fund prospectus. This is a good option (because it leaves your principle intact to work for you from day one) if you plan to leave the funds invested at least long enough to reduce the sales charge to 1-3%. Be aware, though�the DSC is often charged on the full redemption amount, rather than the amount of the individual purchase (again, review the fund prospectus). Most funds that are sold on a DSC basis allow you to redeem up to 10% of your investment per year without charge. It is a good idea to do this, even if you just move the redemption proceeds to the same fund�s front end equivalent, because management fees may be less on front end funds. This also provides an opportunity to �crystallise capital gains�. That is, in the eyes of Revenue Canada, although your assets may have gone up or down in value, no capital gain or loss has occurred until you create a �deemed disposition� (see �deemed disposition�). Therefore, if you have capital losses you wish to use, or if your income is lower than usual in a given year and it makes sense to declare some capital gains, it makes sense to �crystallise� a capital gain. The same can be true of capital losses if you have capital gains that you would otherwise be taxed on. Fund Family A group of mutual funds owned and managed by the same corporation. (This is important because it is generally much easier to transfer between funds in the same family.) Future Value The amount an investment will be worth at some point in the future at the current rate of return. A related term is present value�that is, the current value of an amount that will be worth a stated amount at some point in the future. For example, if I invest $1000 at 10% interest for one year, the present value of my investment is $1000. The future value of the investment is $1100. Futures Contracts (traded on exchanges) that allow the holder to buy or sell commodities, currencies, etc., at a stated price on a stated date.
G GICA Guaranteed Investment Certificate, issued by banks, trust companies and credit unions in Canada. The Guarantee refers to insurance cover by CDIC (banks and trust companies) or the Member Protection Fund (credit unions). Maximum coverage under this guarantee is $60,000 per person under CDIC coverage and $100,000 under MPF coverage, subject to certain restrictions and exceptions. GICs pay a stated amount of interest to the investor. Interest can be compound (adding to the principal on the payment date) or regular, meaning that interest is paid to the investor. Terms can range from 30 days to 5 years. Gross Debt Service Ratio Your creditors will want to know what yours is! This term refers to the percentage of your total earnings that is required to meet all payments associated with housing. (The recommended maximum is 32%.) Gross Domestic Product (GDP) The value of all goods and services produced in a country in a year. This figure does not currently recognise unpaid work, such as homecaring and child rearing, but is limited to goods and services that change hands for units of value Gross National Product Like GDP (above), but includes profits and interest on endeavours by Canadians living or investing abroad as well as at home. Growth Stock Guaranteed Income Funds A mutual fund that invests in GICs and term deposits. Guaranteed Term The period during which annuity payments are guaranteed. If the annuitant dies during this period, payments will be made to the beneficiary. Without this guaranteed term, annuity payments would automatically cease on the annuitant�s death. Guardian A person who has been legally designated to care for the needs of a minor child or a person who is in some way incompetent to manage their own affairs.
H, I & J HedgeA protective manoeuvre designed to limit losses. There are many ways of hedging, almost all of which are complex transactions that should be practised by extremely sophisticated investors or industry professionals. Home Buyers� Plan This plan allows RRSP holders to withdraw up to $20,000 from their RSP to purchase a new home. In order to qualify, you cannot have lived in a home you owned by yourself or your spouse for the past 4 calendar years (except for the 31 days prior to your withdrawal.) Therefore, if you were to make a withdrawal in the year 2000, you could not have lived in a home you owned after January 1, 1996. If you quality, each spouse can withdraw up to $20,000, with repayments of 1/15 per year required beginning in the third calendar. For a year 2000 withdrawal, the first 1/15 would be due by March 1, 2003 for inclusion on your 2002 tax return. Hypothecate A term used in English speaking Canada to describe the process of pledging assets as security against a loan, �hypothec� is actually the French word for mortgage. I Income BondIn most cases, an income bond is one that promises to repay the principal investment, but will only pay interest income when that income is earned by the issuing corporation. Income Splitting The process of arranging income streams so that taxable income is diverted by a higher-taxed individual to a lower-taxed one. Index A benchmark, or measuring device, created by tracking the performance of a group of stocks or other investments, against which the performance of other investments are measured. Examples are the S & P 500 Index, the Wiltshire 2000 Index, and the TSE 300. Initial Public Offering (IPO) A commonly used stock market term that refers to a new issue of stock being offered to the public for the first time. Installment Receipt A stock or equity investment that allows the investor to pay in instalments rather than in one lump sum. Inter-vivos trust Also referred to as a living trust, which is what it is. A testamentary trust is one formed to take affect after your death, using the assets of your estate. If you create a trust while you are living, it is an inter-vivos trust. These trusts are created to minimise probate fees and allow for the direct transfer of your assets to your beneficiaries (so they are not included in your estate). Both living and testamentary trusts are advanced tax planning tools, and should be created only with competent tax, financial planning, and legal advice. Intestate The state of dying without a valid will. Intra-Day Tracking The charting of the price movement of a stock or other investment within a one-day period Investment Strategy A plan to distribute investments among various asset classes and specific investments, in consideration of personal goals, time horizon and risk tolerance. J Joint & Last SurvivorA type of annuity clause that provides income payments until both the annuitant and the annuitant�s spouse die. L LSVCCs (or Labour Sponsored Venture Capital Corporations)LSVCCs are a type of mutual fund sponsored by labour organisations, for the purpose of funding small and medium size business. As an incentive, governments offer attractive tax credits to investors. An example in BC is the Working Opportunity Fund, for which the investor receives a tax credit of 30% on investments up to $3000. As a result of their focus on small business within a certain locale, these funds are somewhat speculative in nature. Leverage Increasing the return (and risk) on an investment by borrowing and using the borrowed funds to invest. This is an advanced planning strategy�don�t do it without advice from a competent financial advisor that you trust. Life Income Fund (LIF) An alternative to an annuity upon maturity of a locked-in RSP. If you leave a corporation prior to retirement, you often have the option of receiving your pension funds, however, they can only be transferred to a locked-in RSP or used to purchase an annuity. In the past, when you wished to receive income from the holdings of the locked-in RSP, or when you reached age 69,.the only option was to cash it in and purchase an annuity. In recognition of current interest rate conditions in Canada, this legislation was recently changed to allows LIFs�essentially, a retirement income fund that has prescribed minimum withdrawals (like RRIFS) and prescribed maximum withdrawals. LIFs provide greater investment flexibility and the potential for greater returns than an interest bearing annuity. Lifelong Learning Plan This relatively new program allows RRSP holders to withdraw up to $20,000 from their RSP plans to upgrade their education. To be eligible, you and/or your spouse must be enrolled full-time (or part time for students who are disabled) in a qualifying program of at least three months in duration. The limit is $10,000 per years to a maximum of $20,000 over 4 years. Repayment required is 1/10 per year beginning in the six calendar year following the first withdrawal (2006 for those withdrawing in 2000) or the second consecutive year in which the student is not qualified to claim the education credit. Similar to the Home Buyers� Plan, any repayment not made as required must be declared as income for the year the payment was due. Liquidity An important investment term that is used to describe the ease with which an asset can be converted into cash without a significant financial penalty for doing so. Load See Front End Load Locked-In This term is used in reference to many investments and investment plans. A GIC may be referred to as locked-in if it cannot be redeemed prior to maturity. On the stock market, an investor is referred to as �locked-in� if he cannot sell a stock he owns either because no one else wants it, or because to do so would create an onerous loss. Probably most commonly, we hear this term in reference to �locked-in RSPs�, which are RSP accounts created from pension fund money. In a locked in self-directed RSP, investments can be purchased or sold, but funds cannot be withdrawn, or used to fund a mortgage on one�s home. Locked-In Retirement Account (LIRA) The equivalent of a locked-in RSP. A registered plan that can receive pension proceeds. Long If you want to sound like a really savvy investor, instead of saying “I own 100 ABC shares,” you can say “I am long 100 shares of ABC.” The opposite of “long” is “short”. This means that the savvy investor has sold 100 shares of ABC that he doesn�t own, in the hope or expectation that the price of the shares will drop before he has to buy 100 shares to cover his contract. Savvy?
M Management Expense Ratio (or MER)One of the single most important factors to be considered in the purchase of mutual funds, this is an accounting of all of the costs of operating a mutual fund. The MER, when compared to MERs of similar funds, can sometimes give us a glimpse into the efficiency of the fund management. In any case, even when higher MERs are justified by excellent, long term fund performance and/or by unique analytical requirements, MERs reveal the price of holding a mutual fund year to year. Higher than average MERs can result in thousands of dollars in lost return over the life of an investment. As well, MERs remain relatively static (as a percentage of assets) no matter how the fund performs. If a fund is providing returns of 20%, an MER that is 1% higher than average doesn�t seem significant. It can become significant when the market is in decline and the same fund provides negative returns of 4%–of which 3% is MER-related fees. Management Fee This is a misleading term for a misleading figure. Management �fees� are the portion of the MER (see above) that is paid to the fund manager. It does not include the cost of administration, distribution, etc., even though those costs are paid by the fund holders. Focus on the MER. Margin In an account where you borrow funds in order to finance a portion of your investments (a margin account), �margin� refers to the amount you actually own. Trading regulations determine what this amount must be (as a percentage of the account). Marginal Tax Rate A term we hear a lot, it simply refers to the rate you would be taxed on the �next dollar� of income. Market Order A stock market term for an order to purchase or sell securities immediately, at any price. Median When comparing performances of investment vehicles or categories, an Average is a weighted comparison, that is, the performance of large funds or companies will impact the measurement more than that of smaller funds or companies. A Median, on the other hand, is the mid-point � half of all funds or investments did better, half did worse. Money Market That portion of the capital market created for the short term borrowing and lending of funds. As opposed to being traded on an exchange, these financial instruments are traded through a network of money market dealers, largely over the telephone. The financial instruments traded include short-term (less than three years) bonds, Canada Treasury Bills (T-Bills) and commercial paper (a term used to describe a short term debt instrument issued by an institution or corporation). Money Market Fund A mutual fund that invests in the money market, usually in terms of less than one year (see Money Market, above). These funds normally have net asset values (see NAV, below) set at either $1.00 or $10.00, and offer low but stable returns with low potential for volatility risk. There is a slight risk, however�if a very large group of investors all decided to take their money out at the same time, the fund may be forced to sell investments at below market or par value. This is a very slight risk, but if we see some kind of future market hysteria, it is not an impossibility. (In the case of such hysteria, either start it and be first out, or stay put until you have a long talk with your financial advisor!) Money Purchase Plan Another name for a defined contribution pension plan. Employees �purchase� future benefits through their contributions, and generally have some flexibility in determining how the funds will be invested. Future pension benefits, then, are determined by the amount of contributions to the plan, and the return on investment, and cannot be forecast in advance. Hence the name�the pension proceeds are not known but the contribution amount is. (Employers may or may not contribute to a money purchase plan.) Mortgage Backed Securities (sometimes referred to as NHA Mortgage Backed Securities or MBS) These fixed income instruments are currently sold in units of $5000, with a term of five years. They are backed by a pool of mortgages insured by the National Housing Association (so there is no risk of default by the mortgagor). Each month, the investor receives interest and a portion of the principal. If mortgages within the pool are paid out in advance of maturity, the MBS holder will receive a lump sum in reflection of that payment. Mortgage Backed Securities trade in the bond market, at prices reflective of current interest rates. Depending on available rates and prices, these can be very attractive RRIF and retirement income investments. Mutual Fund A pooled group of investment funds, providing professional management and the opportunity for maximum diversification. The total value of the investment fund is divided into �units�, which are then allocated to investors at a net asset value (see below). There are money market mutual funds, dividend mutual funds, equity mutual funds, growth mutual funds, sector mutual funds, foreign mutual funds, real estate mutual funds, fixed income mutual funds—many, many different kinds of mutual funds with different underlying assets, different investment styles, and different objectives. Unit-holders benefit from a fund�s success through dividends (which are usually reinvested in new units of the funds; one of the significant benefits of owning mutual funds rather than most stocks), and through increase in the unit�s value, as the value of the pool of investments grows. In the opinion of the author, mutual funds are by far the best way for the average investor to invest�but proceed with caution and professional advice. Not all mutual funds are good mutual funds.
N Naked WriterThis is the definition provided by the Canadian Securities Institute “A seller of an option contract who does not own an offsetting position in the underlying security or a suitable alternative. The rules for establishing whether a position is naked or uncovered are detailed in the CSI�s Canadian Options Course.” Net Asset Value In stock market environs, net asset value is the measure of total assets of a corporation minus total liabilities. Net asset value is sometimes referred to as shareholder�s equity. Net Asset Value per Share (NAVPS or NAV) The valuation of mutual fund units, net asset value is the measure of the total value of the assets of the fund, minus any liabilities of the fund, divided by the number of units outstanding. No-Load Fund Note A short term debt security (usually five years or less) O OfferWhen bid meets offer, we have a contract. An offer is the price at which a holder of securities is willing to sell them. Offering Memorandum A legal document, reporting the pertinent aspects of an investment, for the review of potential investors. Similar to a prospectus, but released without the same degree of scrutiny by the regulatory bodies. See Prospectus Online Trading Yahoo! The buying or selling of investments on the Internet, generally through a discount brokerage like E-Trade or TD Waterhouse. Open Order Another stock market term that refers to an order that is �open� (or valid) until filled or until expressly cancelled by the investor. Option A sophisticated financial instrument that allows an investor to speculate on the future prices of securities. A �put� allows an investor to sell securities at a specified price on a specified date; a �call� option allows an investor to purchase securities at a specified price on a specified date. An option provides the right, but not an obligation, to purchase or sell at the stated price within the stated period. Over-the-Counter The term to describe the market for securities not traded on the exchanges�not the place for any but the most sophisticated and steel-nerved investors.
P Par (Another term for face value)The value for which the instrument can be redeemed. For instance, if a $10,000 bond were trading �at par� it would be sold and bought for exactly $10,000. If were trading �at a premium� the purchase price would be higher than $10,000; if it were trading �at a discount� the purchase price would be lower than $10,000. Savvy? Penny Stock The colloquial term for stocks that trade at less than a dollar. These are generally very speculative issues traded on the resource market (the CDNX). Although the potential gains can be astronomical, these exchanges offer most of us (those of us that are not industry insiders) investment opportunity approximately equivalent to that of bingo. Buyer beware! Pension Adjustment (PA) The adjustment made to your RSP maximum contribution limit, based on the combined value of your employers contribution to your pension plan as well as your own. Although this calculation is complex, you should never have to do it�your PA is provided on your T4 at the end of the year, and is also provided on your Statement of Assessment from Revenue Canada. Portfolio A group of investments owned by an individual or institution Portfolio Manager The person or company responsible for investing assets and managing trading. Portfolio Tracking Monitoring the price movement of a group of investment using various analytical tools � usually something we now do on the Internet. Present Value The value of an investment right now, as opposed to the amount it may be worth in the future. Price-Earnings Ratio (Also referred to as P/E ratio or P/E multiple) This is a calculation used to determine whether a stock is expensive in relation to its underlying profitability. If you purchase stocks from a broker, you will probably hear this term. It is, quite simply, a company�s earning per share divided by its share price. Prospectus Make sure you get it�make sure you read it. A prospectus is a legal document, required by law, that discloses everything you need to know about a particular investment. If you cannot bear to read it all, read the section entitled “Risk Factors” and the section entitled “Summary of Investor Expenses” and/or every section that sounds as if it might relate to risks or fees.
R Real Rate of ReturnA figure you should always know as it applies to your investments�real return is the stated return on your investment, minus tax considerations, minus the rate of inflation. Real Time A term usually used in reference to Internet price quotes � �real time� means you are seeing the price at this very minute � many pricing services, on the other hand, particularly the free ones, provide pricing with a twenty-minute lag time. Redemption The sale of an investment or security, usually to the company that issued it � most often used to refer to the redemption of mutual fund units (which are sold back to the mutual fund company, essentially) or to the redemption of a bond on maturity. Registered Education Savings Plan (RESP) A registered savings/investment program that allows us to accumulate funds in a tax sheltered environment to pay for secondary education for our children, nieces, nephews, grandchildren, etc. Contributions are not deductible, but returns on the funds are tax sheltered, and are then taxed in the hands of the student, who presumably will have little other income. Prior to the last budget, RESPs were limited in popularity due to their onerous restrictions. If the child for whom the plan was intended chose not to attend university, the principal investment was refunded but the tax sheltered income was lost. With recent changes, however, a contributor can transfer up to $40,000 of sheltered income to their RSP (if they have contribution room), they can transfer it to another related �beneficiary� (another child), or they can take it into income (albeit at a punitive tax rate). In addition, the annual contribution limit has been increased from $2000 to $4000, and the Federal Government has introduced the Canada Education Savings Grant (CESG). This program will provide a grant of 20% (to a maximum of $400 per annum) of annual contributions to a RESP. All in all, RESPs have become a very attraction education planning strategy. Registered Pension Plan (RPP) A pension plan (generally established by an employer) on behalf of its employees to provide pension income in retirement. See Defined Benefit Plan and Defined Contribution Plan. Registered Retirement Income Fund (RRIF) In the year that you turn 69, you must close your RSP. Your options are as follows you may cash the entire amount in. This is usually a terrible idea, as the entire amount will be treated as income for that year, and will be taxed at the highest rate for your tax bracket. You can use the funds to purchase an annuity. In times of high interest rates, this can be a very attractive option. In times of low interest rates, an annuity still provides a predictable income stream, but may not provide adequate returns to fund a long retirement. You can convert the RSP into a RRIF. RRIFs are like RSPs in that there are a variety of different options available. A RRIF can be �managed� (the kind you buy at the bank that pays interest) or it can be a mutual fund RRIF (in which your funds are invested in one mutual fund family). You can also have a self-directed RRIFs (in which you can invest in any qualified investment). A self-directed RRIF works best for anyone that had a self-directed RSP, as you don�t have to redeem your investments simply to convert to a RRIF. Like RSPs, you can have as many RRIFs as you would like, but it makes sense to have as few as will meet your needs. Registered Retirement Savings Plan Very simply, a tax deferral plan. To encourage Canadians to prepare for their retirement, RSPs allow us to defer paying income tax on a portion of our income until we withdraw the funds. When we contribute (within prescribed limits��our maximum contribution�), Revenue Canada will refund the amount of tax we have already paid on that amount, or will use the deduction to offset any tax we owe. An RSP is not an investment in itself. Funds contributed to an RSP can be invested in a vast range of assets, from the mortgage on your own home, to Canada Savings Bonds, to term deposits. However, the account that holds these investments must be �registered��hence the term RRSP. When you fill out your application (actually a registration contract), the plan trustee notifies Revenue Canada that the plan exists, and that you are contributing to it. That way, Revenue Canada ensures that they get their piece of the action at withdrawal time, and that any RSP deduction is legitimate. See also RRIF Reinvestment Using dividends or income on an investment to purchase more of that investment, rather than receiving it in cash. Renewable Insurance A feature on some term insurance policies that allows the insured to renew the policy without �evidence of insurability� (medical information, etc.) at the premium rate applicable at their age. Without this feature, it is probable that someone with health challenges would not be reinsured when their term insurance matured. Return The amount of income you receive from an investment Reverse mortgage A loan against your home (mortgage) that is used to purchase an annuity, which then provides monthly income. This is an option for those seniors that have very limited cash flow but own their homes outright�however, because compound interest works against us here, a reverse mortgage should only be arranged after consulting a competent financial planner. Right Another stock market term. A right is a privilege granted to existing shareholders that allows them to buy more shares at a stated price. These rights are often sold as part of share package, enhancing the value of the shares. Risk In the investment industry, risk is defined as the possibility that a particular investment will not do what we expect, or hope, it will do. At its simplest essence, risk is the possibility of loss. The principle of investment risk is universal and operates without exception the higher the expectation of return, the higher the probability the investment will not perform as expected. At the risk of being redundant, I�ll say it again. There are no exceptions, no matter what you hear, no matter what you are told. Higher potential returns equal greater risk. Risk Tolerance S Self-Directed RSP An RRSP plan in which we can hold any qualified investment. Unlike managed RSPs, in which the manager (either the mutual fund manager or the bank, for instance) decides where our money will be invested, in a self-directed plan, we get to decide. In return, we pay an administration fee, usually between $100 and $150 per year. Sector A defined portion of a market, industry, or economy, e.g., oil and gas sector, industrial sector, technology sector. Securities Another term for investments or assets. Share(s) A term used interchangeably with �stock(s)� Shareholder An investor who owns stocks (or �shares�) of a company. With mutual funds, this investor is normally referred to as a �unit-holder�. Speculation �Speculators� often don�t know they are. In fact, speculation can be defined as anyone that purchases an investment hoping that it will increase in price within a defined (usually short) period of time. Conversely, an investor is someone that purchases an investment through a desire to participate in that company�s success (or asset�s increase in value) over an extended period of time. Spousal RSP Contribution An RSP contribution that is made (and deducted) by one spouse on behalf of the other. This is an effective income-splitting device, and is especially valuable when one spouse gives up career earnings and pension opportunities to stay home with the children. If spousal contributions are withdrawn, they are taxed in the hands of the contributing spouse for the first three calendar years. Therefore, it is a good idea to make spousal contributions in December rather than RSP season (January or February). For instance, if you make a spousal RSP contribution in December, 1997, 1997 is counted as the first year, and withdrawals made in the year 2000 would be taxed in the hands of the receiving spouse. If you are in a lower income tax bracket, earning substantially less income, and your spouse is not making contributions on your behalf, it could be worth asking “Why not?” Stocks Most of us have some knowledge of what stocks are and how they work. To be safe, I�m going to focus on the basics. A stock certificate is a kind of �currency� that serves as evidence of our ownership in a business. The company (or business) can range in size, from a mom and pop craft shop in the basement, to global conglomerates. In the case of M&P Enterprise, it is likely that the shareholders (the owners of the stock, and therefore the business) would be Mom and Pop themselves, perhaps their offspring, and perhaps a relative or friend that had given them some start-up funds in exchange for partial ownership. In the case of the global conglomerate, millions of shares might be in circulation, trading on one or more stock exchanges, and owned by both private investors and institutions (such as banks, mutual funds, and insurance companies). When we refer to “stocks and bonds”, or the “stock” market, we are generally referring to stocks of publicly traded companies. In order to trade their stocks on an exchange, a company must meet certain criteria. This affords the investor a very limited degree of protection. Largely, this protection is limited to the assurance that the company will publicly disclose relevant information. From an investor perspective, the three most important considerations are these
Stock Exchange A marketplace, either real or �virtual�, in which shares of public companies are bought and sold, Stock Index See �index� Strip Bonds See Coupons Strip bonds became very popular in the late eighties as fixed income instruments for RRIFs and RRSPs. If held to maturity, strip bonds provide a predictable rate of return. However, if not held to maturity, they can be quite speculative, depending on the volatility of the bond market. Therefore, it is important they be purchased only with professional advice, and preferably with the intent to hold them until maturity.
T Tax deferralThe process of postponing payment of taxes for as long as legally possible. The longer that you have your money, the longer it can be working for you. (The sooner Revenue Canada has it, the sooner it�s working for them!) Tax shelter Any investment vehicle that allows funds to be �sheltered� from taxation for a period of time. As it is usually used, the term tax shelter refers to rather speculative investments for which the major selling benefit is a tax advantage. In some cases, tax credits or deductions are provided as part of the investment structure. In other cases, certain �losses� or expenses are �flowed through� (attributed to) the investor. The investor can then use these losses to offset income and/or gains from other sources. A word to the wise Tax shelters are not all risky, speculative investments�an RSP is a tax shelter. However, a decision to invest in a tax shelter should always be made on its investment merits, not on its ability to avoid tax. Losing a dollar to save fifty cents never makes sense. I can�t say it often enough�advice from a trusted, competent financial advisor is crucial. Term Insurance A kind of insurance policy that provides coverage for a stated term. Term insurance is much less expensive than whole (or universal) life insurance, as coverage is applicable only to the term for which it is purchased. In other words, the chances of any of us dying in a given year is actually quite slim�however, none of us are getting out of this alive, so whole life policies will pay benefits�the only question is when. Term life is granted on the presumption of certain odds about the number of us that will die in any given year. Term insurance is a great option for short term insurance needs (to provide for our children, for instance, or to pay off a mortgage). However, most of us will live a good many years. If we want insurance to supplement or provide an estate for our heirs, we need whole or universal life. Testamentary Trust A kind of trust that will come into effect after death, that is, it is set out in your will and will be implemented by your executors. See also �Intervivos Trust� Trade The brokerage term for the purchase or sale of an investment Treasury Bill (or T-Bill) These are short-term government debt instruments that are issued in denominations of $100,000 to $1 million. Investors can participate by owning a T-Bill �position� through a bank or brokerage firm; that is, they own a portion of a T-Bill and receive a stated rate of return as provided by the underlying T-Bill. T-Bills are very liquid as they have short maturity periods (usually 91 and 182 days), and can also be bought and sold between maturity dates (i.e., I can sell my T-Bill, maturing in 60 days, to another investor through my brokerage firm). They are fully �government backed�, which means they are extremely safe. T-Bills do not pay interest, per se. Rather, they are purchased at a discount (i.e., a $100,000 T-Bill is purchased for $97,000, therefore the yield to maturity is 3%). Trust A legal instrument placing property or assets in the hands of a �trustee�, a person, persons or an institution elected to manage the assets or property and oversee its distribution to another person or persons. An RSP is a �trust�, but the �trusts� that we normally hear referred to in regard to investment are either Inter-vivos (living) trusts or testamentary (after death) trusts. See Also Inter-vivos Trust
U, V, W, X, Y & Z UnitA term used in reference to mutual fund holdings. Universal Life A form of whole life insurance that provides life insurance coverage and an insurance component that is indexed to money market yields. Universal life is very popular when interest rates are high. Variable Life Another form of whole life insurance, in which the investment portion of the plan is invested in mutual funds. These plans are more flexible and may provide higher returns than universal life policies, but are not as predictable. Volatility The rate at which the price of an investment moves up and down � often used as a measurement of �risk�. Whole Life See Universal Life, Variable Life, and Term Insurance Yield The return on an investment, normally expressed as a percentage. |