Investment Glossary

Adjusted cost base. A change in the original price paid for a security for purposes of determining tax liability for capital gains.

Asset mix. The distribution of your investments among different types of securities. Also known as asset allocation.

Assets. Any securities, deposits, or property that you own. In a typical portfolio, three basic types of assets may be held: cash, income, and growth.

Assets, cash. An asset that can easily be converted to cash. Example: Canada Savings Bonds.

Assets, growth. An asset with the potential to produce capital gains. Example: stocks.

Assets, income. An asset that pays a fixed rate of return. Example: guaranteed investment certificates (GICs).

Back-end load. A type of sales fee charged on mutual fund purchases. The buyer pays no sales commission at the time of purchase, but may be required to pay a redemption charge when the units are sold. This redemption fee, also known as deferred sales charge, typically declines with the length of time thathe fund is held by the investor.

Bonds. Debt certificates issued by borrowers, usually governments or corporations, in order to raise capital for their business activities. A bond will normally have a fixed interest rate and a set maturity date, at which time the principal will be repaid in full. A typical bond will have interest coupons attached that are redeemed annually or semi-annually.

Book value. What you pay for an investment at the time of purchase. At any given time, this cost may differ from the investment’s current price–its market value.

Broker. A person who acts as an intermediary in the purchase of securities or insurance.

Call option. The right to purchase stock at a pre-determined price for a fixed period of time. A covered call is one in which the option seller actually owns the underlying stock.

Canada Premium Bonds. Renamed from Canada RRSP Bonds, these are long-term securities issued by the federal government, specifically designed for retirement plans and education savings plans.

Canada Savings Bonds. Interest-bearing certificates issued annually by the Canadian government. Technically, these are not bonds, but a form of savings certificate. They are considered very safe investments because they can be cashed any time for their face value plus, if they are held for at least three months, any accrued interest.

Capital gain (loss). The profit or loss made on the sale of an asset, calculated by subtracting the purchase price from the sale price. For example, the capital gain on a stock purchased for $2,000 and sold for $3,000 will be $1,000 ($3,000 – $2,000).

Cashable GICs. Securities issued by a financial institution that bear interest at a fixed rate for a set period. Unlike regular GICs, they can be cashed at any time after a holding period, usually 60 days, without penalty. Also called savings certificates.

Compounding. Growth of an investment and its accumulating profits over time. Compound growth rests on the concept of putting an ever-increasing amount to work and can have a powerful effect on your savings rate.

Convertibles. Interest-bearing securities that may be exchanged for shares in a company at the request of the investor. Usually issued as bonds or preferred shares.

Coupons. Certificates attached to a bond that can be redeemed for interest payments at regular intervals.

Coupons, strip. Coupons that have been removed from bonds and sold separately at a discounted price.

Derivatives. A contract that allows the holder to buy or sell a security at a future date, at a specified price. Most contracts trade on the stock market.

Deferred sales charge. A fee charged when units of a mutual fund purchased on a back-end load option are redeemed. (See also back-end load.)

Deposit insurance. Coverage of certain types of assets against financial failure of member institutions. Banks and most trust and loan companies are members of the Canada Deposit Insurance Corporation (CDIC). Credit unions are covered by corresponding provincial agencies.

Diversification. An investment technique intended to minimize risk by placing money in a number of securities with various risk-return characteristics.

Dividends. Payments made to shareholders of a company or a mutual fund. These may be in the form of cash or additional shares or units.

Dividend tax credit. A special tax credit intended to reduce the effective rate of tax paid by investors on dividend income. The rationale is that Canadian corporations have already paid tax on their earnings and are distributing dividends out of their after-tax income.

Dollar-cost averaging. The practice of investing a fixed amount of money in a security on a regular basis over a period of time. The outcome is that variations in the purchase price are smoothed out.

Front-end load. A sales commission charged up-front on the purchase of units of a mutual fund.

Guaranteed investment certificates (GICs). A security issued by financial institutions, such as banks and trust companies. A typical GIC bears a fixed rate of interest and may not be cashed before maturity. GICs with terms of up to five years issued by members of the Canada Deposit Insurance Corporation (CDIC) are covered by deposit insurance to a maximum of $60,000. GICs issued by credit unions are protected by provincial insurance plans, and coverage varies from one province to another.

i60 Fund Units. Index participation units based on the S&P/TSE 60 index. Unlike their predecessor, Toronto Index Participation 35 and 100 Shares, which were exchanged for i60 units in March 2000, i60 units were created and managed by an organization outside the stock exchange itself.

Index. A measure of how a particular market is performing based on the performance of selected stocks or bonds. An index serves as a benchmark by which to measure the performance of a particular investment.

Interest. The income an investor receives in return for giving an institution the use of your money. On bonds and bank accounts, this is expressed as an annual or daily percentage. For example, the April 1, 2000 issue of Canada Savings Bonds paid interest at an annual rate of 4.6 percent for the first year.

Interest, accrued. The amount of interest that is owed on a loan at any given time.

Interest, compound. Interest paid on the original principal plus any reinvested interest.

Investment. A security purchased for income or profit. Examples: stocks, bonds, and mutual funds.

Investment, aggressive. A security with a moderate degree of risk. The potential return on aggressive investments is above average. Example: equity mutual funds.

Investment, conservative. A security with a high measure of safety but relatively low growth potential. Example: Canada Savings Bonds.

Investment income. Payments received from investments. Such payments may be in the form of interest or dividends.

Investment, speculative. A security with a high degree of risk and little or no established record of payoff.

Labour-sponsored funds. Mutual funds that benefit from special tax treatment by the federal government and from some provincial governments. The goal of these funds is to provide seed capital to fledgling companies; investors get tax breaks for supporting such start-ups.

Liquidity. The quality of a security that allows it to be converted easily to cash.

Load. The commission charged when mutual fund units are bought (front-end load) or sold (back-end load).

Management fees. Charges made against a mutual fund by its managers in compensation for their services. These charges are usually made against the assets of the fund itself, not directly to individual investors. The size of the management fee has a great effect on a fund’s overall performance, as the more it pays out, the lower the fund’s return.

Marginal tax rate. The tax rate payable on the last dollar you earn. Usually, investment income will be taxed at your marginal rate, except when earned in an RRSP or other registered plan in which your savings are sheltered from tax.

Mutual funds. Pools of investment money, managed by professionals. Mutual funds may invest in a wide range of securities, from stocks to mortgages.

Mutual funds, balanced. Funds that hold a mixture of stocks, bonds, and cash.

Mutual funds, bond. Funds that concentrate their assets in government and/or corporate bonds.

Mutual funds, closed-end. Funds in which the total number of shares is limited. These resemble stocks in that, if shares are not purchased at the initial offering, they must be purchased from an existing owner. Closed-end funds often trade on stock exchanges.

Mutual funds, equity. Funds that invest in stocks.

Mutual funds, fixed income. Funds that invest in securities, such as bonds, that pay interest at a fixed rate.

Mutual funds, high yield. Funds that invest in securities that generate above-average income streams. Typical holdings of high-yield funds include royalty trusts, real estate investment trusts, and low-grade (junk) bonds.

Mutual funds, load. Funds that allow sales representatives or brokers to charge a commission when units are bought or sold.

Mutual funds, money market. Funds that invest in short-term securities, such as Treasury bills. These funds offer investors a good place to hold cash reserves.

Mutual funds, mortgage. Funds that invest primarily in residential first mortgages.

Mutual funds, no-load. Funds that have no obvious sales commission or redemption charges. These funds still have management and operating costs that are charged to the investor.

Mutual funds, open-end. Funds that place no limit on the number of units issued. New units are offered continuously and are purchased directly from the fund’s treasury.

Mutual funds, precious metals. Funds that invest in precious metals, mainly gold but including silver and palladium. A fund may hold the metal itself, shares in mining companies, or a combination of both.

Mutual funds, real estate. Funds that invest in real estate, usually commercial and industrial. Although a few of these funds hold real property directly, because of concerns about liquidity, most choose to invest in companies such as developers, property managers, and financiers that participate in the sector.

Net asset value (NAV). The value of a mutual fund unit at any given time. It is calculated by subtracting the fund’s liabilities from its assets and dividing by the number of units outstanding. Open-end mutual funds are bought or sold at their net asset value.

Portfolio. All the investments held by a person. If the investments are held in an RRSP, the portfolio is considered to be “registered” and any growth is not subject to tax until money is withdrawn.

Put option. The right to sell a stock at a pre-determined price for a fixed period of time.

Registered education savings plan (RESP). A government-approved program for saving for a child’s future education. Although RESP contributions do not generate tax refunds, earnings do grow tax free.

Registered retirement income fund (RRIF). A government-registered retirement fund set up with proceeds from an RRSP. A minimum amount must be withdrawn annually, in accordance with a set formula. Contributions to a RRIF are not permitted, although transfers from other registered plans are allowed under certain circumstances.

Registered retirement savings plan (RRSP). A program designed to encourage Canadians to save for retirement by providing tax relief for contributions and earnings inside a plan. All RRSPs must be registered with the Canada Customs and Revenue Agency.

Return. The amount of money earned by an investment. The rate of return is the percentage this represents. Example: A $1,000 investment that produced a return of $100 over 12 months would have an annual rate of return of 10 percent.

Risk. The extent to which any investment is exposed to potential losses. A loss can take several forms, ranging from a decline in value in relation to the original purchase price, to an erosion in purchasing power due to inflation. There are no investments that are completely risk-free, but some, such as Government of Canada Treasury bills, come close.

Savings certificates. See Cashable GICs.

Segregated Funds. Similar to mutual funds, but sold as part of insurance contracts. They offer certain benefits not available with regular mutual funds, such as guarantees of principal on maturity and death benefits.

SPDRs (Standard & Poor’s Depository Receipts). Basket products for international investing, SPDRs are index participation units based on the S&P 500 Composite Index.

Stock market. A formal organization that gives members a central facility for buying and selling shares in public companies. The Toronto Stock Exchange (TSE) is the largest one in Canada.

Stock market, bear. The term used to describe a market in which the general value of shares is falling.

Stock market, bull. The term used to describe a market in which the general value of shares is rising.

Stock market index. A measure of a market’s performance. The TSE 300 Index is based on 300 leading stocks listed on the Exchange, and is the most widely quoted in Canada.

Stocks. Shares in public companies, representing ownership or “equity.” They may or may not trade on recognized stock exchanges. Common stocks usually (but not always) carry voting rights. Preferred stocks usually will not have voting rights, but often pay a higher rate of dividend.

Stocks, blue chip. A term used to describe shares in sound, well-established companies, usually with a long history of consistent dividend payments.

Stocks, concept. Shares in small companies that may have a good business idea but no significant production or sales on record.

Stocks, growth. Shares that have strong potential to appreciate in value.

Stocks, penny. Shares in junior companies that usually trade for less than a dollar each. Such stocks are considered highly speculative.

Stocks, unlisted. Shares that do not trade on a recognized stock exchange.

Strip Bonds. Bonds from which interest coupons have been removed, or “stripped.” They are sold at a discount and redeemed for face value at maturity. The difference between the purchase price and face value represents the bondholder’s return. Also called zero-coupon bonds.

Switching. Moving money from one mutual fund to another. Many mutual fund companies allow switching with little or no charge among their own funds.

Taxable income. The amount of income subject to tax after all possible deductions have been claimed.

Term deposit. A security issued by a financial institution that bears a fixed rate of interest. Some term deposits may be cashed before maturity, usually with a penalty.

Treasury bills. Short-term securities issued by governments and sold at retail by stockbrokers and banks. Those issued by the Government of Canada are regarded as excellent short-term investments because of their safety and good return.

Unit. A share in a mutual fund.