A

Account Closing Fees: Monies charged to clients when accounts are closed. Not every institution charges these fees.

Accredited Investor (also called a Sophisticated Investor): Clients – either individuals or institutions – that meet specific minimum thresholds of investment knowledge, net worth and/or income. 

Accumulation Plan: Mutual fund plans that let investors automatically purchase shares or units at specific intervals. 

Acquisition Fee (also called a Front-End Load): A fee to the client, based on the amount being invested, charged when an investor buys units of a mutual fund. It is the opposite of a Redemption Fee or Back-End load.

Active Portfolio Management: Portfolio management strategy that aims to generate greater returns than the market, by actively purchasing and selling investments at opportune times. This strategy assumes markets can sometimes be inefficient and relies heavily on market timing.

Adjusted Cost Base (ACB): The original cost of an asset, adjusted to include fees or commissions paid to acquire the investment, plus reinvested distributions minus redemptions. The ACB is used to determine gains or losses for tax purposes.

Administrative Bodies: Federal, provincial and territorial regulators, including securities commissions and other organizations charged with ensuring financial markets operate fairly.

Alpha (see Active Portfolio Management): Measurement of value added by an active portfolio manager to a portfolio. Managers who beat statistical market benchmarks are said to create positive alpha, while those who miss those benchmarks create what is called negative alpha. Alpha is generally measured based on performance over at least a one year period.

Alternative Managed Products: Financial products other than mutual funds, including exchange traded funds (ETFs), hedge funds, principal protected notes (PPNs), commodity pools, closed-end funds, income funds, trust funds and segregated funds. While normally made up of the same asset classes used in mutual funds, some, but not all, of these professionally managed portfolios are higher risk.

Amortization: A process by which an asset (such as real estate) is paid off over a period of time. The term also can be applied to writing off the value of intangible assets such leasehold improvements, or the goodwill of a business.

Amortization Period:The period (usually predetermined) over which a borrower is scheduled to repay a loan or mortgage. A common amortization period for mortgages is 25 years.

Amortized Cost: A portion of the cost of an asset that’s written off as either amortization or depreciation in a company’s books. It represents the accumulated amortization or depreciation to a certain date.

Annual Information Form (AIF): Addendum document, filed once a year, that outlines information left out of an investment’s simplified prospectus and annual financial statements. The information in the AIF usually contains information on relevant events or trends that will likely impact the issuer’s business or industry.

Annuitant: The holder of a structured insurance contract to whom an income stream will be paid.

Annuity: An income stream paid out to an investor by a life insurance company, based on an initial invested amount and a predetermined formula. Payments, which are a combination of the original contribution amount and investment income, are made for a fixed-period, or for the life of the annuitant. 

Appraisal Firms: Companies that collect and report performance data from mutual fund companies and market centres.

Arbitrage Transactions: Purchase and sale of the same security on different exchanges designed to take advantage of subtle differences in price.

Arithmetic Mean Return: A formula that calculates average annual returns by adding up annual returns and dividing them by the holding period in years. Since it does not account for varying return rates in different years, it is considered inaccurate.

Ask Price: A minimum price quoted by the seller of a stock or other security on an exchange.

Asset Allocation: Percentage mix of investments in a portfolio across different classes or security types. This generally refers to the percentage of equity (considered riskier), debt (considered lower risk) and cash.

Asset: Anything of value. Business assets are owned by a company. Personal assets are owned by people.

Assets Under Management (AUM) : Dollar value of investments being managed by a firm; including assets owned by both the firm and third parties (i.e. clients).

Assets Under Administration (AUA): Dollar value of investments being administered by a firm, that are beneficially owned by a party other than the firm.

Auction Market: A centralized exchange where clients list securities to sell and buyers enter bids to buy securities. This differs from an over-the-counter market in which transactions take place between investment dealers.

Audit: Review of an issuer’s financial reporting required to ensure conformity with International Financial Reporting Standards (IFRS). 

Auditor’s Report: A report from an independent auditing body confirming the accuracy and consistency of a company’s financial statements.

Autorité des marchés financiers (AMF): Quebec’s financial markets regulator which oversees the financial sector, securities, financial institutions, compensation, and distribution of financial products and services.

Availability Bias: A method that allows people to estimate the probability of an outcome based on how prevalent or familiar that outcome appears in their lives. #BehaviouralFinance

Average Annual Return: A calculation adding investment returns over a year, or years and then dividing by the number of years to determine an annual rate of return.

C

Call Premium: Difference between a security’s face value (or par value) and the price an issuer has to pay to call it in from holders.

Callable Preferred: A security that can be called in (or redeemed) by its issuer.

Canada Education Savings Grants (CESG): A federal government grant matching 20% of the first $2,500 contributed annually to a Registered Education Savings Plan (RESP). Grants are available until a child turns 18.

Canada Pension Plan (CPP): Federal government pension plan, contributed to by all employed Canadian residents outside Québec, and received by qualifying recipients, beginning as early as age 60.

Canada Premium Bond (CPB): Debt instruments issued by the Canadian government to Canadian residents. CPBs offer higher interest rates than the Canada Savings Bonds. They are redeemable without penalty on the anniversary of issue, or within 30 days of that date. Canada Premium Bonds were discontinued in 2017. Click HERE for more information.

Canada Savings Bond (CSB): Debt issued by the Canadian government to Canadian residents.  CSBs offer guaranteed interest rates for one or more years. These bonds do not trade on the secondary market and instead are sold back to the government at face value. They do not have the same interest rate risks associated with other bonds. Canada Savings Bonds were discontinued in 2017. Click HERE for more information.

Canadian Investment Funds Standards Committee (CIFSC): Oversight body responsible for creating a standardized classification system for Canadian-based mutual funds. 

Payments Canada (formerly called Canadian Payments Association (CPA)): Body charged with maintenance of clearance and settlement of transactions and payments among member financial institutions.

Capital: Assets invested, or which can be invested in securities, real estate or other objects of value. Free cash. Or, the means of industrial production. 

Capital Account: An account held by a national government to record transactions between countries. Along with the Current Account, they are the two accounts used in recording the balance of payments.

Capital Gain: The difference between the redemption price of an asset and the adjusted cost base.  A capital gain occurs when an asset, such as a stock, bond, or property, is sold for a higher amount than the original cost. It is the opposite of a capital loss. In Canada, only 50% of capital gains is taxable.

Capital Growth: Investments designed to appreciate in value over time, often with a higher level of risk than other investments.

Capital Loss: The difference between the redemption price of an asset and the adjusted cost base.  A capital loss occurs when an asset, such as a stock, bond, or property, is sold for a lower amount than the original cost. In Canada, 50% of capital losses can be used to reduce taxable capital gains.

Career-Average Plan: A type of defined-benefit pension plan that considers an employee’s average earnings over an entire career to determine the pension benefit. 

Carry Forward: Unused Registered Retirement Savings Plan (RRSP) contribution room that is brought forward, and can be claimed in future years; theoretically usable at any time.

Cash Account: A non-registered investment account which does not allow the use of margin or credit to purchase investments. 

Cash Flow: The inflow of money in the form of income and the outflow of money in the form of expenses over a period of time. 

Cash Flow from Operations/Total Debt Ratio: Calculation comparing cash flow to debt in order to determine a company’s ability to repay borrowed funds. Total debt ratio = (cash flow from operations) / (total debt outstanding)

Cash Management: Process employed by central banks to buy and sell bonds on the open market to control a country’s money supply. 

Chambre de la sécurité financière: A self-regulatory organization body that oversees continuing education requirements and enforces its code of ethics for members within the province of Quebec.

Client Name Account: An account held with a mutual fund in the client’s name. (See also Nominee Account)

Client Service: Meeting the individual needs of each client.

Closed Mortgage: Home loan which restricts prepayment from the borrower, often with penalties. 

Closed-End Discretionary Funds: Funds permitted to periodically buy back their outstanding shares.

Closed-End Fund: Funds transacted on the open market for which a fixed number of shares are issued. Fund values are determined by the market value of securities within those funds. 

Code of Ethics: Behavioural norms, including trustworthiness, fairness, honesty and integrity, agreed upon by financial professionals.

Cognitive Bias: Judgement or other errors that humans are prone to committing. 

Cognitive Dissonance: A mental state that occurs when a person has to cope with conflicting information, or information in conflict with their personal beliefs.

Coincident Indicators

When economic indicators, like GDP, jobless claims and personal income, move in harmony with economic activity. Economists use this to determine the health and stage of the business cycle.

Collateral: Assets pledged by a borrower to secure a loan.

Commercial Paper: Debt security issued by a creditworthy company that promises to pay the full value at date of maturity. Generally short-term and highly liquid.

Commodity Pools: Leveraged mutual funds that use derivatives in a variety of short selling strategies.

Common Shares (Common Stock): Shares represent a portion of ownership in a company and entitle the shareholder to one vote per share at a company’s annual general shareholder meeting. Common shares sometimes, but don’t always, pay dividends to shareholders.

Comparison Universe: Group of portfolios used as a basis for cross-referenced comparison. 

Compliance: A regimen designed to ensure employees and agents of a financial institution follow internal and regulatory requirements. 

Compounding: The effect of interest earned on interest earned.  This happens when interest earned is reinvested, rather than spent.

Concentration Risk: Excessive exposure to an individual investment, sector, country or region within an investment portfolio. Also explained as ‘putting all your eggs in one basket’.

Confidentiality: Maintaining that information about clients, their transactions and accounts, will be kept private and discrete.

Consumer Price Index (CPI): A statistical measurement that calculates to average cost for a basket of goods and services purchased by consumers. Price fluctuations are compared against the CPI of a base year.

Contract Holder: The party who owns a contract, such as a segregated fund contract.

Contraction: The decline phase of an economic cycle, which typically follows the peak phase.

Contractionary: The reduction of the money supply by a central bank in attempt to suppress economic growth.

Contribution in Kind: A process of moving securities from a non-registered account into a registered account. This type of transfer triggers a deemed disposition and requires the account holder to pay any capital gains taxes associated with gains between the time of acquisition and transfer. However, when securities in a loss position are transferred, no losses can be claimed. 

Contribution Room: The allowable contribution limits to registered accounts such as RRSPs or TFSAs. Contribution room is a dollar amount, based on the total allowable contribution limit established by the federal government for the year plus unused contribution room from previous years. Unused contribution room can be carried forward indefinitely.

Conventional Mortgage: Mortgages for 80 percent or less of a property’s purchase price or appraised value, whichever is lower.

Convertible Bond: A bond that can be converted, by the bondholder, into a set number of common shares of the issuing company. The issuer also sets the dates for these conversions and can trigger them in response to conditions in the equity markets.  

Convertible Preferred: Preferred shares that can be converted, by the shareholder, into a set number of common shares of the issuing company. The issuer also sets the dates for these conversions and can trigger them in response to conditions in the equity markets.  

Corporate Bonds: Bonds issued by companies to finance the purchase of physical assets, like equipment. Assets are often used as collateral to ensure the debt is repaid. Corporate bonds are subject to a much higher default risk than government bonds. 

Correlation: Measurement of the degree to which price movements of one asset is associated (or correlated) with the movements of another.

Cost-push Inflation: Inflation triggered by increases in the costs of producing goods. Higher energy prices, for example, will push up the cost of manufactured goods, or goods that have to be transported over long distances to reach markets.

Coupon: A periodic interest payment made by the bond issuer to the bondholder at specific times; typically, semi-annually.

Coupon Rate: Interest rate that a bond issuer promises to pay semi-annually, or another agreed-upon period, to bondholders.

Credit Rating: Measurement of a company’s ability to pay back loans. High credit ratings indicate repayment is highly likely, or conversely that risk of default is very low.

Cumulative Preferred: Preferred shares that require any missed dividend payments to accumulate as outstanding until the next payment period. Issuers of cumulative preferred shares cannot pay dividends to common shareholders until all outstanding accumulated missed dividends are paid to preferred shareholders first. 

Currency: Money issued by a government, or federation of governments.

Currency Forward Contract: Transaction contract that locks the exchange rate for a future purchase. The contract establishes the transaction date.

Current Account: Account that records net trade of goods and services, net transfers between countries and net payments of interest abroad. Along with the Capital Account, they are the two accounts used to track the balance of payments.

Current Assets: Assets expected to be converted to cash within one year. The term also applies to cash and cash equivalents.

Current Income: Income earned from fixed-income funds making regular interest or dividend payments. Shareholders use these funds to pay daily expenses.

Current Liabilities: Any liabilities that will be settled within the calendar or fiscal year.

Current Ratio: A calculation that determines a company’s liquidity by dividing its current assets against current liabilities.

Current Yield:The coupon rate divided by the security’s current market price. (the security is usually a bond).  The current yield is used to compare short-term returns of different securities. A similar calculation for a money market mutual fund is based on annualized yield over the most recent seven days without assuming compounding of returns.

Custodian: A trust company or bank that safeguards securities and takes care of receipt and disbursement of funds.

Cyclical Unemployment: A type of unemployment resulting from increases in joblessness spurred by economic decline. 

D

Dealer Market: Over-the-counter market, on which investment dealers buy and sell securities on behalf of clients. Sometimes called the unlisted market

Death Benefit: The sum of money paid to a named beneficiary at the time of one’s death. On a term insurance policy, the death benefit amount is known in advance. 

Debenture: A long-term debt instrument with no pledged collateral. Although no collateral is specifically pledged against debenture issues, the creditworthiness and reputation of the issuer are said to be the source of the security for these instruments. Theoretically, since no collateral is pledged, these instruments could pose a higher default risk than bonds which have pledged collateral. 

Debt Instrument: A financial obligation issued by a party wishing to borrow funds from investors. The promise to repay the funds is the debt instrument. The investor lends money to the issuer by purchasing the debt instrument, in return for a promise to repay the principal, with interest. Debt instruments are also called fixed income securities and include bonds, debentures, mortgages, treasury-bills and commercial paper. 

Debt Security: A bond or other security based on a loan made by investors to the issuer. (See debt instrument)

Debt/Equity Ratio: A financial ratio used to assess financial leverage by determining the amount of a company’s debt relative to its equity. Debt-to-Equity Ratio = Total Debt/Shareholder’s Equity

Declaration of Trust: Legal fund structure documents that outline its principal investment objectives, policies, restrictions and the classes and/or series of units to be issued. Documents will also name the trustee, manager and custodian.

Deemed Disposition: A notional sale of property, that is said to have occurred, even though a sale did not actually take place. This can occur from a transfer of assets in-kind, or when a taxpayer leaves Canada permanently or dies. 

Default Risk: The risk that a debt issuer will be unable to make its obligated interest or dividend payments, or that the principal amount will not be repaid upon maturity. 

Deferred Sales Charge: A fee, based on the amount being invested, charged by mutual fund issuers when funds are redeemed within a certain period following the initial purchase. It is the opposite of an acquisition fee or front-end load. (same as Back-End Load)

Defined Benefit Pension Plan (DB Plan): An employer-sponsored pension plan that defines the eventual size of an employee’s pension benefit. DB plans are typically calculated based on years of service and average or final years’ salary levels.

Defined Contribution Plan: An employer-sponsored pension plan that bases the eventual size of an employee’s pension on the sum he or she contributes during years of service. Employee contributions are generally matched at some level by the employer. (See Money Purchase Plan)

Deflation: Decline in the overall price of goods and services. Although it is rare, this happens if the inflation rate, as measured by the Consumer Price Index, slips below zero percent.

Demand: Consumer desire to purchase additional goods and/or services.

Demand-Pull Inflation: Inflation triggered by excessive consumer demand.

Deposit-Taking Institution: Bank or trust company which pools, then invests, customer deposits.

Depreciation: Decrease in value of a fixed asset, like factory equipment, due to wear and tear.

Derivatives (Derivative Securities): A financial asset, such as an option or future, which is valued based on the performance of another security or asset.

Direct Distribution: A method of selling mutual funds, where sales are made directly to investors using centralized order takers and sales personnel.

Directional Strategy: A strategy that attempts to anticipate the direction of market prices for equities and other investments, often employed by hedge funds.

Disclosure: Information reports from companies including information related to material changes to the company affairs. This is required to ensure investors are informed of any information they may require to make investment decisions.  Furthermore, this is one of the main principles of securities regulation in Canada.

Discount: An investment value below its par value. 

Discount Broker: An investment dealer that trades securities for clients on an order-taking basis only. Discount brokers do not provide clients with advice.  For this reason, trading fees for discount brokers are generally lower than full-service brokers. 

Discount Rate: The rate of interest applied in a financial calculation when computing present or future values.

Discouraged Workers: Individuals who wish to work but have not made an effort to find suitable employment in the previous four weeks. 

Discretionary Funds: Money not needed for routine expenses. 

Discretionary Income: Money left over after fixed expenses are subtracted from income from employment, pensions or investments.

Discretionary Trading: Purchase or sale of investments made by an advisor, broker or other representative without the explicit permission from the client prior to every trade.

Disinflation: A slow-down in the overall rate of inflation, or the rate at which prices rise. 

Diversification: Holding a variety of investments in order to reduce the risk they’ll all be impacted simultaneously by a single economic event. A portfolio can be diversified based on countries, economic sectors, or companies in which it invests. The objective is to ensure some of the investments are increasing in value when others decrease.

Dividend Fund: A mutual fund that holds primarily dividend-paying common and preferred shares. 

Dividend Income: Income received from dividends of common and preferred shares.

Dividend Tax Credit (DTC): A tax credit provided to grossed-up dividend income earned by taxpayers. Preferential tax treatment is granted to dividend income received from both common and preferred shares of taxable Canadian corporations. The dividend is grossed up by 38% and the tax credit of 15.02% is calculated on this amount. 

Dividend Yield: An annual dividend amount expressed as a percentage of the current price of the dividend paying share.  

Dollar Cost Averaging: Periodic purchase (monthly or quarterly) of an investment, such as a mutual fund, at a set dollar amount. The number of units purchased rises and falls along with the fund’s unit price. This lowers the per-unit cost over the long haul.

Drawdowns: When chartered banks transfer deposits to the Bank of Canada.

Dual Employment: People who are registered as both insurance agents and mutual fund sales representatives are said to be dually employed.

Duration: A measure of the sensitivity of a bond or bond portfolio to interest rate changes. The lower the duration, the smaller the change in bond value to changes in interest rates; and vice versa.

Duty of Care: A standard of conduct that requires mutual funds representatives to ensure the priority of clients’ interests. It encompasses three main components: Know Your Client, Due Diligence and handling Unsolicited Orders. 

E

Earned Income: A person’s income from employment, minus any unemployment benefits, pension or investment receipts.

Earnings Per Common Share (EPS): A ratio that represents company earnings on a per-share basis.  This is derived by dividing net income of a company by the number of outstanding common shares. 

Economic Indicators: Statistics providing information about the current state of an economy and economic direction.

Effective Yield: Calculation applied to money market mutual funds that assumes yield generated over the last seven days remains constant going forward for one year. It also assumes the rate applies to weekly compounding of returns. 

Efficient Market: A hypothesis that believes that security prices reflect all existing information available within the marketplace.

Electronic Commerce (E-commerce): Business activity, including purchase transactions, distributions and transfers taking place over the internet.

Electronic Documents: Documents that are created or stored within a computer system and which can be transferred using computer networks.

Electronic Signature (E-signature): Digital signature used to sign an electronic document.

Emotional Bias: A reasoning process characterized by irrational behaviour, abandonment of logic and a giving in to emotions. People have a strong emotional bias against losing money.

Endowment Bias: A bias that places more value on an asset that the holder owns than an asset that is not owned. 

Equilibrium Price: The price at which demand equals supply.

Equity (Equity Instrument): Financial instrument that provides an investor an ownership stake in a company.

Equity Growth Fund: A type of investment fund that holds smaller companies which are expected to grow and experience an increase in share price. Investors with high risk tolerance are best suited for these high-growth funds.

Equity Index Fund: A type of mutual fund designed to earn capital gains by mimicking a stock market index, such as the S&P/TSX Composite Index.

Equity Mutual Fund: A type of mutual fund designed to earn a combination of capital gains and dividend income by investing in common shares of larger firms that don’t produce significant capital gains but do pay consistent dividends.

Ethical Conduct: Acting in a manner that complies with both the spirit and letter of the law.

Ethical Responsibility: The requirement of an advisor or agent to consistently put the client’s needs before his or her own, or before those of his or her employer.

Ethics: The principles of right and wrong based on moral convictions that guide a person to make the right decision when regulations cannot.

Event-Driven Strategy: A strategy aimed at generating returns from unique events such as mergers, acquisitions, stock splits and stock buybacks, generally employed by hedge funds.

Excess Returns: Returns produced by an undervalued security, over and above what is needed to compensate for the risk of investing in that security.

Exchange Rate: Price at which one currency is bought or sold for another.

Exchange Rate Risk: Risk that unexpected changes to exchange rates will negatively impact the value of cash payments from a foreign source, or the worth of foreign assets. Global investments, or investments held in foreign currencies are subject to this risk. (Also called Foreign Exchange Risk)

Exchange-Traded Fund (ETF): A marketable investment that tracks an index or basket of securities; similar to an index mutual fund, but which trades like an individual stock on an exchange. 

Expansion: A phase of the business cycle, following the recovery phase, during which business activity increases. 

Expansionary Policy: Approach to monetary policy aimed at increasing the supply of money.

Explicit Costs: Costs incurred directly by investors, which fall into three categories: management fees, operating expenses and sales charges.

Extra Dividend: A dividend paid in addition to the normal, expected dividend.

F

Fairness: A doctrine of disclosing all information that may be relevant to an investor’s decision to buy or to sell in securities markets.

Final Average Plan: A type of defined benefit pension plan based on an employee’s length of service and average salary in the final years of his or her career, presumably when the salary is at its highest. 

Final Good (Finished Good): Finished product that is purchased by its intended end user.

Financial Action Task Force (FATF): Inter-governmental body that develops international policies and recommendations on anti-money laundering and anti-terrorist financing.

Financial Circumstances: A variety of personal financial factors including a client’s employment and investment income, the security of those income sources, annual expenses, assets and liabilities.

Financial Goals and Objectives: Client’s desire or need for investment return (such as income, growth, etc.), liquidity needs, and risk tolerance that lead to his or her choice of investments. 

Financial Intermediaries: Deposit-taking or non-deposit-taking trust companies, chartered banks, investment dealers, and life insurance companies, through which suppliers and users of capital access markets.

Financial Markets: Transaction venues, physical or electronic, on which suppliers and users of capital are matched.

Financial Planning: A multi-step process to help individuals set financial goals, analyze their financial circumstances, make recommendations and help them implement the plan to attain the established goals. Financial planning involves custom recommendations on budgeting, investing, retirement planning, risk management, tax minimization, and estate planning, monitoring these recommendations and periodically making adjustments to those recommendations. 

Financial Planning Pyramid: Visual aid used to help clients understand their current state of financial affairs and identify and prioritize future planning needs.

Financial Statement Analysis: Assessment of value and financial soundness of a company based on an examination of its financial accounting information.

First-Order Risk: Systematic or market related risk linked to the direction of interest rates, currency exchange rates, equity prices and commodity prices. 

Fiscal Policy: Policy implemented by a government where changes are made to government spending or taxation to influence the behaviour of an economy.

Fiscal year: A company’s accounting year – though not necessarily the calendar year. Companies often start their fiscal years on their founding dates, or may choose another date to ensure employees can manage to close the books at a time other than the holidays.

Fixed Assets: Tangible assets expected to last longer than one year.

Fixed Trust: A pool of debt securities with the same maturity date that is created by an investment dealer and sold off to individual investors. This differs from a bond fund in that it has a set life span and is not actively managed.

Fixed-Dollar (Constant) Withdrawal Plan: Systematic withdrawal plan allowing investors to receive fixed sums from periodic investment redemptions.

Fixed-Income Fund: An investment fund made up primarily of fixed-income securities.

Fixed-Income Securities: Securities that generate a fixed income; meaning they pay income or dividends at a predetermined rate.  Examples include bonds, debentures, mortgages and preferred shares.

Fixed-Period Withdrawal Plan:A systematic withdrawal plan allowing investors to receive fixed sums from periodic asset redemptions.

Flat Benefit Plan:A defined benefit pension plan that pays a set dollar amount in retirement based on the number of years an employee works for a company.

Forecast: Estimate of cash flow to be earned during the coming year and/or sale price for a security at year’s end.

Foreign Exchange Risk: Risk that unexpected changes to exchange rates will negatively impact the value of cash payments from a foreign source, or the worth of foreign assets. All foreign investments, and investments denominated in a currency other than the home currency are exposed to this risk. (Also called Exchange Rate Risk)

Foreign Investors: Investors who live outside a country in which they invest.

Frequent Trader:An active buyer or seller of securities such as stocks, bonds and derivatives who sometimes close all positions before the end of a trading day. Sometimes referred to as a day trader. 

Frequent Trading Charge:Charge levied by some mutual funds to prevent rapid redemption of funds, or excessive fund switching. 

Frictional Unemployment: The portion of unemployment resulting from normal movement of people in and out of the workforce due to termination and creation of jobs.

Front-End Load: A fee, based on the amount being invested, charged by the mutual fund dealer at the time of purchase. It is the opposite of a back-end load or deferred sales charge. (Also called an Acquisition Fee)

Fund Distributor: The distribution network connecting investment products, such as mutual funds, to retail investors.  

Fund Facts Document (Fund Facts): A short form document, written in plain language designed to communicate pertinent facts about a mutual fund to investors. Each fund must issue a Fund Facts, which cannot exceed two pages in length, and it must be presented to a buyer at the time of purchase. Information contained in the document includes performance, the costs of investing, and the fund’s investment mandate.

Fund Manager: The party that oversees the daily investing activity of a mutual fund portfolio.

Fund of Funds: A mutual fund comprised of units of a pool of other mutual funds. 

Fund Sponsor: A mutual fund investment firm.

Fund Wrap: A fund of funds portfolio allocation method that gives access to portfolios containing multiple mutual funds featuring pre-selected asset allocations. 

Fundamental Analysis: Analysis that aims to determine the underlying factors that create value for a given security, including a company’s management, competitive advantage, economic climate, earnings and sales.

Futures Contract: An agreement to deliver, or take delivery of an asset at a set future date at a set future price, usually applied to commodities.

G

Geometric Mean Return: Calculation to determine average compound return over several time spans.

Glide Path: A formula defining how the asset allocation of a target date fund changes over time to hit its target. The asset mix becomes more conservative as the number of years remaining until the target date shrinks.

Global Equity Fund: A mutual fund class designed to earn dividends and capital gains by investing in equities from around the world.

Global Mutual Fund: Mutual fund class that provides international diversification through worldwide investments.

Government Bond: Debt security traded over the counter (OTC) and issued by federal, provincial, and municipal governments to raise money to fund public projects. Although governments do not typically pledge specific assets, they tend to have high credit ratings, and don’t often default, therefore this type of bond is usually considered low risk.

Gross Domestic Product (GDP): The market value of all goods and services produced by a country’s economy during one year. In the case of Canada, this includes the work products of foreign citizens living in Canada but excludes those of Canadian citizens working outside the country.

Gross Profit: Sales revenues exceeding the cost of producing goods. 

Gross Profit Margin Ratio: A performance ratio that shows the amount of a company’s revenue remaining after subtracting the cost of goods sold. 

Growth at a Reasonable Price (GARP): An investment strategy that looks at both growth and value opportunities. GARP manager look for companies projected to grow earnings and produce high return on equity (ROE). However, stocks with high price to earnings (P/E) ratios and high price to book (P/B) ratios are avoided.

Growth Investing: An equity investment strategy focused on a firm’s prospects and profits, rather than its current stock price.

Guaranteed Investment Certificate (GIC): Deposit certificate that provides a predetermined rate of interest for a set term in exchange for a minimum investment. There can be penalties for redeeming these products early, such as forfeiting any interest earned. 

Guaranteed Minimum Withdrawal Benefit (GMWB): An investment contract, similar to a variable annuity.  The GMWB allows a holder to withdraw a certain fixed percentage of his initial deposit annually until the entire principal is returned, regardless of fund performance.

H

Hedge Fund: A pool of capital that is lightly regulated and given flexibility to employ aggressive investment strategies.

Hedging: A strategy to reduce the risk of loss caused by market fluctuations to retain more of a portfolio’s value. Managers often use derivative securities as hedging instruments.

High-Water Mark: A performance bar set for fund managers based on a previous high value. Managers who clear the bar receive incentive fees as compensation.

Holding Period Return: A measure of the transactional rate of return that accounts for all cash flows and changes in a security’s value during a given time frame.

Holdings-Based Style Analysis: Examining each holding in a portfolio at a specific point in time and mapping it to a style.

Household Budget: Listing individual or family income versus expenditures used to determine how much someone can invest.

Hurdle Rate: A minimum required return rate a hedge fund manager must achieve to receive an incentive fee; normally benchmarked against a short-term, risk-free asset like a Treasury bill.

Hybrid Security: A type of security that possesses features that are typical of both bonds and common shares.

I

Implicit Costs: Costs incurred indirectly by investors, such as embedded sales commissions.

Incentive Fees: Fees normally calculated less management fees and expenses, rather than on the manager’s gross return.

Independent Review Committee: A committee of independent reviewers responsible for approving or considering conflicts of interest identified by a fund’s manager. National securities regulations require that each mutual fund have an independent review committee.

Inflation: Sustained increase in prices of goods and services.

Initial Public Offering (IPO): The first issuance of a company’s shares to the public, usually through the listing on an exchange.  All shares bought in an IPO are bought directly from the company.  They are traded amongst investors thereafter. 

Insider: A person or entity that may have knowledge about a company’s operation that has not been made available to the public.

Insider Trading: Trading in securities using non-disclosed or non-public information.

Instalment Debenture: A bond or debenture in which a predetermined amount of the principal matures every year.

Institutional Investor: A legal entity representing the financial interests of a large collective group. Examples include pension funds, insurance companies and mutual funds. 

Interest Coverage Ratio: A leverage ratio that represents a company’s ability to pay the interest on its outstanding debt.

Interest Income: Income that a borrower pays a lender for lending money, usually through fixed-income securities.

Interest Rate Anticipation: An investment strategy that moves between long-term government bonds and short-term treasury bills based on interest rate forecasts over a set time horizon. As term to maturity increases, and the coupon decreases, the price becomes more sensitive to interest rate movements.

Interest Rate Risk: The risk that changes in market interest rates will decrease the value of an interest-bearing security. When interest rates rise, the value of fixed-income securities fall. When interest rates fall, the value of fixed-income securities rise.

Interest Rate: The cost of borrowing money, expressed as a percent. Their direction is set and influenced by the activities of central banks.

International Funds: Investment funds that invest outside Canada.

Interval Funds: A type of closed-end fund that periodically buys back outstanding units of that fund. 

Inventory Turnover Ratio: Statistical representation of the number of times a company’s inventory is turned over in a year, or the number of days required to achieve that turnover.

Investigation and Prosecution: A process by which rules violations by industry professionals are scrutinized and through which offenders are prosecuted. A securities commission can examine, and if necessary seize documents, subpoena witnesses, and generally act as an administrative tribunal. It also has authority to prosecute an action against a violator, resulting in fines and possibly imprisonment.

Investment Company: A firm responsible for hiring investment managers and distributing its funds in return for management fees from the mutual funds it controls.

Investment Dealer: A firm that acts on behalf of clients in the transfer of instruments between different investors. It can also act as principal. Also called brokerage firms or securities houses.

Investment Fund: A portfolio of investments, such as a mutual fund, giving investors access to a pool of securities.

Investment Horizon: The length of time an investor has to grow assets prior to a target date, such as retirement. It has now been broadened to refer to the time needed to achieve return objectives. 

Investment Industry Regulatory Organization of Canada (IIROC): The Canadian national self-regulatory organization for the securities industry responsible for setting and enforcing rules governing proficiency, business and financial conduct of dealer firms and their registered employees. It also sets and enforces market integrity rules covering trading activity in Canadian equity markets.

Investment Knowledge: An investor’s understanding of investments and characteristics, such as risk and return.

Investment Manager: A person responsible for building and managing an investment fund’s portfolio. (Also called a Portfolio Manager)

Investment Policy Statement (IPS): A mission statement governing how an investment fund is managed.

Investment Portfolio: A diversified collection of securities, that can include stocks, bonds, money market securities, and derivatives.

J

January Effect: The belief that stocks tend to increase in value during the month of January. This can be especially true of small cap stocks.

K

Know Your Client (KYC): A requirement that an advisor use due diligence and learn essential facts about each client and every order. This includes the client’s financial status, family commitments, and financial goals, to ensure investment recommendations are appropriate.

Know Your Product: A requirement that an advisor understands the risk level, fees, type of income generated, tax consequences and other characteristics of the investment he or she sells.

L

Labour Force: The portion of a population aged 15 and older who are capable of work, regardless of whether they are employed or unemployed.

Lagging Indicator: An economic indicator that measures a change after the relevant phase in the business cycle has passed.

Leading Indicator: An economic indicator that can help determine the next phase of the business cycle.

Legal Responsibility: An advisor’s responsibility to ensure each client only buys suitable investments. This responsibility is articulated in all provincial securities acts.

Leverage: The use of borrowed funds to invest.

Liabilities: The obligation to provide or repay cash, goods or services at a future date.

Life Annuity: An insurance product that guarantees payments for the rest of an annuitant’s life.

Life-Cycle Hypothesis: The theory that people’s risk tolerance and personal circumstances change as they age. Asking questions related to this hypothesis can be used as part of the Know Your Client process.

Life Income Fund (LIF): A termination option for locked-in pension accounts such as a LIRA. Similar to a RRIF but with both minimum and maximum annual withdrawal requirements. RRSP funds are not transferable to a life income fund.

Life Insurance: A contract between a policy holder (the insured) and an insurer which promises to pay a cash sum to the policy’s named beneficiary upon the death of the policy holder, in exchange for a monthly, or annual premium.

Life Withdrawal Plan: A systematic redemption of mutual fund units, similar to a fixed-period plan, except the selected period is the investors expected remaining lifetime.

Limit Order: An order to buy or sell a security at a specific price or better.

Limited Partnership: A partnership agreement in which a partner’s liability level is limited to his or her individual investment, and in which a limited partner cannot participate in daily business activities.

Liquidity: The ease with which an asset can be sold at its market value. Cash is considered the most liquid asset.

Liquidity Ratio: A ratio that describes a company’s ability to meet short term liabilities, calculated by dividing a company’s current assets against current liabilities. (See also Current Ratio)

Load: A sales commission charged upon the purchase or redemption of a mutual fund. (See also Front-End Load and Back-End Load)

Locked-In Retirement Account (LIRA): An account that will hold assets from an employer-sponsored pension plan if the plan is terminated before an employee retires. Assets cannot be withdrawn from a LIRA before reaching retirement age.

Lock-Limit Up / Lock-Limit Down: A predetermined price limit, up or down, that a commodity is limited to trade. Trades above or below the lock-limit are not executed. 

Locked-In RRSP: A registered retirement savings plan that prevents the account owner from making withdrawals before a certain age, which depends on the province of residence.

Long Position: When an investor purchases an investment, and expects the value to rise, the position is said to be long. Conversely, when an investor sells an investment that he or she does not own, and expects the value to fall, the position is said to be short. 

Long-Term Liabilities: Debts or other liabilities that a company will still have one year from now.

Loss Aversion: A bias toward the fear of losing money, even if it means missing out on more significant price gains.

M

Macroeconomics: The study of an economy as a whole, and its performance, structure and behaviour.

Managed Futures: Active trading of derivative products such as currencies, financial assets and physical commodities.

Managed Products: A portfolio compiled from basic asset classes and sometimes commodities, which can include hedge funds, closed-end funds, commodity pools, principal protected notes (PPNs), and segregated funds.

Management Expense Ratio (MER):A calculation, required under National Instrument 81-102, that includes both management fees as well as fund expenses, and lets investors compare management fees and expenses between mutual funds and other managed money products.

Management Fees: Fees charged by all investment dealers, such as mutual fund companies, to pay fund managers or investment advisory services. Management fees are deducted directly from the fund.

Margin: A sum of money an investor must leave on deposit to use borrowed funds to trade securities. It is generally based on a percentage value of those securities and the money is normally provided by a stockbroker.

Margin Account: An investment account that permits the use of borrowed money for securities trading. Money is borrowed against the securities held in the account.

Marginal Tax Rate: The rate of tax that will be applied to a taxpayer’s next dollar of income earned.

Market: A venue, physical or electronic, in which goods, products or services are bought and sold.

Market Efficiency: A hypothesis that market prices accurately reflect all available information and all investments are priced at a fair value.  

Market Order: An order to buy or sell a security at the current market price.

Market Ratios: Ratios used to measure the value of a company’s shares and compare with other companies.  (See also Value Ratios)

Market Review: The section of a mutual fund’s financial statement where the fund manager provides commentary and perspective on overall market performance, and the impact on the fund’s recent performance. It also includes an outlook or forecast for the coming months.

Market Risk: Fluctuations in securities markets that impact even the most diversified mutual funds. A slumping market will impact any stock-based fund.

Market Sentiment: Investor attitude toward the markets generally or with regard to a specific stock.

Market Timing: Shifting a portion of a portfolio’s asset mix from investments in one sector or asset class to another based on expectations of economic trends or sector news.

Marketable Government Bond: Government debt that can be purchased or sold between investors in a secondary market. 

Material Fact: Information that, if correct or true, would impact an investor’s decision to buy or sell a security.

Maturity Date: The date at which the par value of a bond is to be paid to the bondholder. 

Maturity Guarantee: The minimum value of an insurance contract after the guarantee period, typically 10 years. Also referred to as the annuity benefit. 

Mean: The average of a set of values. It is the sum of all values divided by the number of values. 

Microeconomics: The study of an individual’s decisions as it relates to limited resources such as time and money.   

Momentum Investing: An investment strategy that suggests investments with strong performance will continue to perform well.

Monetary Aggregates: The measurement of how much money is in the hands of companies, governments and households in a given country. Different asset measures (stocks, bonds, real estate, cash, etc.) are grouped based on how readily they can be converted to cash.

Monetary Policy: Regulation of the money supply by a government designed to control for inflation and promote long-term economic growth and stability.

Money Laundering: An illegal process, punishable under the Canadian Criminal Code, to disguise money or assets that come from criminal activity.  

Money Market Funds: A low-risk, liquid, mutual fund that invests in treasury bills, commercial debt and other cash-based investments. 

Money Purchase Plan: An employer-sponsored pension plan that bases the size of the pension on the amount contributed during years of service. Employee contributions are typically matched at some level by the employer. (See Defined Contribution Plan)

Money Supply: Total value of all cash circulating within an economy.

Mortgage: A real estate loan secured by a property that requires the purchaser (the mortgagor) to repay the debt, plus interest, over a predetermined period to the mortgagee. 

Mortgage Fund: A portfolio of residential and commercial mortgages and sometimes limited to properties insured by the National Housing Act (NHA). In many cases, these funds are issued by the banks that initiate the mortgage loans, and will buy back any loans that have defaulted, reducing the risk of the fund. 

Mutual Fund: A professionally managed investment portfolio broken into an unlimited number of units that are bought and sold directly by the fund. The unit price is determined by the value of the securities it holds – not by market price. 

Mutual Fund Dealers Association of Canada (MFDA): The national self-regulatory organization (SRO) for the distribution side of the Canadian mutual fund industry. 

Mutual Fund Sales Representative: An individual licensed to give advice on, and sell, mutual funds products to clients in the province or territory in which they are registered.

N

National Instrument 81-101: A Canadian Securities Administrators (CSA) law governing the content of a mutual fund’s simplified prospectus.

National Instrument 81-102: A Canadian Securities Administrators (CSA) law establishing rules covering all aspects of creation and management of mutual funds in Canada.

National Registration Database (NRD): A national, electronic repository containing the names, and personal information of all registered securities industry professionals in Canada.

Natural Resource Fund: An investment fund that invests in natural resource companies, including gas, oil, forestry and mining.

Natural Unemployment Rate: The level at which an economy is considered to be fully employed and operating at or near capacity. It is considered the lowest rate of unemployment an economy can sustain long-term.

Net Asset Value Per Unit (NAVPU): The net asset of a fund, divided by the number of units outstanding. Also called Net Asset Value Per Share (NAVPS).

Net Profit Margin: A ratio showing a company’s profitability factoring in both expenses and taxes to determine how efficiently the company is managed.

Net Worth: The total value of a person’s or company’s assets, minus all liabilities.

New Account Application Form (NAAF): A detailed form which an investment professional uses to gather material information about a party, which is used to determine the suitability of investment recommendations for a client. This form must be completed and approved before any trades can be made.

No-Load Fund: An investment fund that does not charge sales fees.

Nominal GDP: The dollar value of all goods and services produced, at prevailing prices in that given year.

Nominal Interest Rate: The rate quoted on an investment or loan, typically used for comparison purposes, but do not factor the inflationary effects. Typically used for comparison purposes.

Nominal Return: A rate of return on an investment, which has not been adjusted for taxes and inflation. For a bond, this would equal the coupon rate.

Nominee Account: An investment account registered in the dealer’s name, or a third-party administrator, on behalf of the beneficial owner.

Nominee Owner: The owner of securities, which are registered in their own name.  

Non-Conventional Mortgage: A mortgage loan for an amount greater than 80 percent of a property’s assessed value which requires mortgage insurance under the National Housing Act (NHA).

Non-Deposit-Taking Institution: A company that acquires capital by pooling premiums from client policies, rather than by taking deposits, such as insurance companies. Premiums are invested to generate returns allowing the company to meet the obligations of those policies. 

O

Odd Lot: A transaction order for stocks of less than the normal unit amount, usually 100 shares. 

Offering Memorandum (OM): A disclosure document that provides the details and terms of an investment for sale, that is not reviewed by a regulator. This is similar to a prospectus.

Old Age Security (OAS): A government benefit, payable to qualifying Canadian citizens and legal residents over the age of 65. 

Open Mortgage: A mortgage that a borrower may repay in full without penalty at any time, prior to the conclusion of its term.

Open-Ended Mutual Fund (Open-end Fund): A professionally managed investment portfolio broken into an unlimited number of units that are bought and sold directly by the fund. The unit price is determined by the value of the securities it holds – not by market price. 

Open-End Trust: A fund with a structure that does not generate tax liability because all interest, capital gains and dividend income are passed on directly to unit holders, net of fees.

Open-Market Operations: A method, sometimes used by the Bank of Canada, to influence interest rates by trading securities with money market participants. 

Operating Expenses: Expenses incurred from day-to-day business activities. For mutual funds, these include administrative expenses, audit fees, brokerage fees, and securities filings. 

Operating Performance Ratios: Ratios, including profitability and efficiency measures, that indicate how well a company is using its resources and controlling costs.

Option Contract: A derivative security giving its holder the right, but not the obligation, to buy or sell an underlying asset at a set price within a fixed period of time.

Option Premium: The payment received by an investor for writing/selling an option contract.

Organized Exchange: An electronic or physical trading venue that lists securities, and matches buyers and sellers of securities. 

Output Gap: The difference between an economy’s actual output, or real gross domestic product (GDP), and its potential output (potential GDP).

Overconfidence: A cognitive bias resulting in too much faith in one’s own judgements and abilities. 

Over-Contribution: Contribution to a registered plan (RRSP, TFSA) in excess of an individual’s allowed limit. The allowed limit is a combination of that individual’s annual maximum plus any carry-forward room, less any contributions already made.  Taxpayers are permitted an over-contribution of up to $2,000 to their RRSP without penalty; however, additional over-contributions will incur a tax penalty. 

Overnight Rate: The interest rate at which major Canadian financial institutions lend money to each other on an overnight basis.

Over-the-Counter (OTC) Market: A computer network, over which bonds, and sometimes shares, are traded between investment dealers. 

P

Par Value: The face value of a preferred share or bond. 

Participating Preferred: Preferred shares that pay an additional benefit to their holders if there are profits remaining after dividends have been distributed to common shareholders.

Participation Rate: The percentage of working-age population that is employed or actively looking for employment.

Passive Portfolio Management: An investment approach that seeks long-term performance through a buy and hold approach. It is opposite to an active portfolio management approach.  

Peer Group: A group with similar ideals.  In the case of investing, a peer group would have similar investment mandates. 

Perfect Negative Correlation: When return patterns for different securities or asset classes move in exact opposite direction. The peaks in one match the troughs in the other to the same degree.

Perfect Positive Correlation: When return patterns for different securities or asset classes move in the exact same direction. The peaks and troughs move in perfect tandem with one another.

Performance Assessment: The evaluation of a fund manager’s performance, usually by comparing it against an established market benchmark to determine if the returns are acceptable.

Performance Averaging Formulas: The calculation method for the payoff of a principal protected note (PPN), which is based on an average performance of the PPN’s underlying asset and not on the value at maturity.

Performance Participation Cap: A promise to pay a return earned by a specific asset within a principal protected note (PPN), up to a capped maximum dollar amount.

Performance Universe: A group of securities, such as mutual funds, with similar qualities, that are compared against one another. 

Perpetual Preferred: A preferred security that has no maturity date.

Personal Circumstances: Details about a client that effect his or her ability to undertake market risk and which impact the setting of financial goals.

Personal Data: Client information including employment circumstances, age, marital status, health, number of children and other dependents and risk tolerance. 

Personal Information Protection and Electronic Documents Act (PIPEDA): A federal privacy law that outlines how businesses must handle personal information in the course of commercial activity. 

Phillips Curve: The inverse relationship between unemployment and inflation; that unemployment can be reduced at the cost of higher prices, or that inflation can be reduced but at the cost of higher unemployment.

Policy Statements: Statements issued by securities commissions that outline policies or regulations such as uniform policies, provincial policies, national policies and national instruments. 

Pooled Registered Pension Plan (PRPP): A registered retirement savings vehicle, available to employees and self-employed individuals who do not have access to a workplace pension. Because the assets are pooled, a PRPP enables its members to benefit from lower administration costs enjoyed by participating in larger pension plans. 

Portfolio Allocation Service: A service that creates an asset allocation of multiple mutual funds, based on a given criteria, for the purposes of creating a fund wrap.

Portfolio Asset Allocation: The process of proportionately dividing assets within a portfolio, across a variety of security types, asset classes or regions according to a certain set of criteria.

Portfolio Funds: Mutual funds that invest in other mutual funds rather than purchasing securities directly. 

Portfolio Investment Objectives: Information about the portfolio holder that is used to determine an appropriate portfolio mix, and therefore the expected returns.

Portfolio Manager: The party responsible for building and managing an investment portfolio, according to a particular set of guidelines or investment mandate. (Also called an Investment Manager)

Potential GDP: The total goods and services an economy is able to produce if labour, capital and machinery are being used at proper capacity.

Pre-Authorized Contribution Plan (PAC): Ongoing, regular, automated purchases of investments that recur at a pre-determined frequency. 

Pre-Authorized Investment Plan: Automated, ongoing, periodic purchases of units of an investment. (Also see Voluntary Accumulation Plan)

Precious Metals Funds: Specialty funds that invest in companies related to gold, silver and other precious metals.

Preferred Dividend Funds: Mutual funds that invest primarily in preferred shares generating a stream of dividend income for unit holders.

Preferred Shares: A preferred class of company ownership issue, that ranks above common share, but below debt in the event insolvency. Preferred shares typically pay pre-determined dividends to holders, but do not include voting rights, except under special circumstances.  Preferred shares pay dividends before common shares. 

Premium:

• Premium Investment Funds: What an investor pays when the price of a fund exceeds its net asset value.

• Premium Derivatives: The cost to purchase a derivative contract. 

• Premium Insurance: The cost to the buyer, of an insurance policy. 

Price-Earnings Ratio (P/E): A ratio calculated as a company’s current share price divided by earnings per share (EPS). This ratio indicates the price of a security based on its current earnings and anticipated growth prospects. 

Primary Market: The market where newly issued and underwritten securities are listed for the first time. This is where initial public offerings (IPOs) take place. 

Principal Protected Note (PPN): A debt instrument which repays investors their principal at maturity, along with interest paid either at maturity or as regular payments linked to performance of the note’s underlying assets, which can include hedge funds, commodities, common shares and mutual funds.

Privacy Commissioner: The commissioner empowered under PIPEDA to receive and resolve complaints, conduct investigations, and audit financial and other institutions’ management of personal information. Clients of financial services firms and all other consumers have the legal right to file complaints regarding PIPEDA compliance, including any perceived breaches of personal information protection.

Private Placement: Security underwriting that is made available to a limited number of buyers, primarily institutional investors. 

Probate: The process of verifying the authenticity of a will. Probate fees are based on the value of an estate’s assets and the province or territory where the will is valid. 

Professional Management: The primary service offered by mutual fund portfolio managers to select investments and reach performance targets.

Professional Responsibility: An obligation to provide the best client service possible. Financial professionals do this by knowing their client, the products they recommend, and refusing to sell products that are unsuitable to their clients.

Profit: The financial gain remaining after a company pays all its expenses and taxes. Dividends are paid out of profits.

Prohibited Practices: Illegal practices or activities considered unacceptable to securities commissions and regulators.

Prospectus: The legal framework of a new security issue outlining the issuer’s financial condition, how funds will be raised and used, and risks associated with the securities in the portfolio. It must be delivered with a new security issue.

Purchase Price Per Unit: Total cost per unit, including acquisition fees, paid by an investor.

Purchasing Power: The value of money, based on how many goods and services a dollar buys. When it goes down, a consumer can obtain fewer goods and services for his or her money.

Q

Quartile Ranking: A measure of how well an investment performed against its peers, expressed on a scale from 1 to 4. Investments in the first quartile represent the top 25 percent, and therefore outperform 75 percent of its peer group. Investments within the top two quartiles represent the top 50 percent are considered to have outperformed their peers. 

Québec Pension Plan (QPP): A government based pension plan, almost identical to the Canada Pension Plan (CPP), providing monthly retirement, disability and survivor benefits to workers in the province of Quebec. As with CPP, participation in QPP is mandatory for workers over the age of 18.

Quick Ratio: A measure of a company’s ability to meet short-term financial obligations. More stringent than the current ratio for measuring liquidity, it is calculated as the current assets minus inventory divided by current liabilities. 

R

Rate of Return: The change in value of a security over a period of time plus cash disbursements such as dividends or interest, divided by the original purchase price.

Ratio Analysis: A quantitative evaluation of financial statements using various ratios.

Ratio Withdrawal Plan: A systematic withdrawal plan where investors withdraw a regular, fixed percentage of their mutual fund. The percentage is fixed at a rate that prevents the fund’s capital from eroding.

Real Gross Domestic Product (Real GDP): The dollar value of all goods and services produced by an economy, adjusted for inflation.

Real Estate Market: The market for residential and commercial properties.

Real Interest Rate: An interest rate adjusted for inflation, measured as the nominal interest rate minus the consumer price index (CPI).  

Real Rate of Return: The return on an investment after adjusting for inflation.

Record Keeping: The act of maintaining complete and accurate personal and financial client records, including notes pertaining to client conversations, and properly storing them in the event of a regulatory request to produce them.

Redemption Feature: A call feature of a corporate bond that allows the issuer to pay back the bondholder before the bond’s maturity date. 

Redemption Fee: A fee, based on the amount being invested, charged by a mutual fund company when a client sells units of the funds. It is the opposite of an acquisition fee or front-end load.

Referral Arrangement: An agreement between two registered salespeople to pay, or be paid, a fee in exchange for the referral of business. This fee can be based on commissions or include a commission-sharing arrangement.

Registered Education Savings Plan (RESP): A tax-deferred savings plan to help pay for post-secondary education. Contributions to the plan are not tax deductible but the program does include matching grants (Canada Education Savings Grants) from the federal government. 

Registered Pension Plan (RPP): A savings plan established by employers to provide a pension to employees upon retirement. These are registered with the Canada Revenue Agency and contributions made by both employers and employees are tax-deductible.

Registered Retirement Income Fund (RRIF): A tax-deferred retirement account to which funds accumulated in an RRSP can be moved and gradually withdrawn from as taxable income. There are no maximum withdrawal limits; however, there is a minimum withdrawal requirement each year. Investors may have more than one RRIF and they can be transferred from one financial institution to another.

Registered Retirement Savings Plan (RRSP): A tax-deferred retirement savings plan allowing investors to contribute a portion of qualifying income and defer tax until funds are withdrawn. Federal rules establish annual contribution limits and withdrawn funds are taxed as regular income even if they are accrued through interest, capital gains or dividends.

Registrar: An entity, usually a trust company, that monitors issuance of common stock. During a transaction, the registrar will receive cancelled securities certificates, as well as the new certificate from a transfer agent (both parties often are housed within the trust company). The registrar then records the transaction and signs the certificate, thereby acting as an auditor of the transfer agent’s work.

Registration: Every securities sales person must be registered with the securities regulators in the provinces and territories in which they do business. The registration bodies are charged with ensuring people in the securities industry behave ethically. 

Regret Aversion: A bias that affects individuals that are afraid to make decisions for fear of making the wrong ones.

Regular Dividend: An amount normally paid annually to shareholders by a company.

Regulators: Entities charged with establishing and enforcing rules related to activities performed by securities market participants to ensure compliance with regulations governing those markets.

Regulatory Bodies: Provincial and territorial administrators in Canada charged with administering provincial securities acts.

Relative Value: A hedge fund strategy that exploits inefficiencies or differences in prices among related stocks, bonds or derivatives in different markets in attempt to generate alpha.

Representativeness Bias: A cognitive bias created by the brain’s tendency to develop an internal system for classifying objects and thoughts. The bias is created when new information conflicts with existing classifications. 

Reset Option: A provision within a segregated fund that allows contract holders to protect profits by resetting the maturity guarantee.

Retail Investors: Individual, non-institutional, investors who buy and sell securities for their own personal accounts, typically in smaller quantities compared with institutional investors. 

Retained Earnings: An entity’s net income that is retained to be used to finance growth, rather than being paid out as dividends to shareholders.

Return: The change in value of a security over a period of time plus cash disbursements such as dividends or interest. (See also rate of return)

Return on Common Equity (ROE) Ratio: A profitability ratio, calculated as profit divided by equity, representing the amount of profit relative to shareholders’ equity. 

Returns-Based Style Analysis: A comparison of a fund’s performance with a selection of passive style indices. 

Reward-To-Risk Ratio: Calculated by dividing a fund’s return by its standard deviation of returns, this ratio shows a fund’s success rate at earning a return against the level of assumed risk. 

Right of Redemption: The right of a mutual fund unitholder to withdraw their investment in the fund for a cash amount equal to the net asset value of the units sold. The fund has until settlement to pay the investor.

Risk: The chance that the actual return of an investment will differ from the expected return. 

Risk Analysis Ratios: Ratios that indicate how well a company can keep up with its debt obligations.

Risk Aversion: A characteristic of investors who prefer low risk investments and are not comfortable with market volatility.  

Risk Profile:The risk characteristics of a particular investment. 

Risk Tolerance: A person’s ability to tolerate market fluctuations and the changes they bring to the value of his or her investments. People who can handle risk are considered to be risk tolerant; those who cannot are risk averse. 

Risk-Adjusted Rate of Return: A performance comparison, adjusted for risk, used to evaluate securities. 

S

Sacrifice Ratio: The amount that Gross Domestic Product (GDP) would need to be reduced to decrease inflation by one percent. A side effect is an increase in unemployment.

Safety of Capital: Investments that are unlikely to erode their principal, such as money market funds.

Sales Charges: Cost paid to mutual fund companies, which are then distributed to sales representatives and/or financial advisors who recommend the company’s funds.

Sales Commission: Monies received by a registered representative or mutual fund salesperson upon the purchase or redemption of a mutual fund. 

Savings: Income not spent. Money in excess of what a household or company needs to meet day-to-day expenses.

Secondary Market: A market that allows previously issued securities, such as equities, fixed-income securities and derivatives, to be bought and sold between investors.

Second-Order Risks: Risks, not related to the markets, that are often associated with investing in hedge funds. They include leverage and liquidity constraints from investing in illiquid securities.  

Sector Rotation: An investment strategy that shifts money from one industry sector to another in attempt to achieve higher performance on the belief that certain sectors fare better during different stages of an economic cycle.

Sector Trading: An investment strategy that varies a portfolio’s weighting of fixed-income from different sectors of the bond market.

Sector Weighting: The selection and concentration of industries represented within an investment portfolio. 

Secured Bond: A bond secured by a specific asset used as collateral in the event of default, if the company fails to make its coupon payments or return the bond’s principal at maturity. 

Securities: Financial instruments in the form of physical certificates or electronic records representing ownership of investment. 

Securities Commission: Provincial and territorial securities administrators responsible for enforcing provincial and territorial securities acts. Collectively the commissions form the Canadian Securities Administrators (CSA), however the power remains with each individual commission. 

Security Analysis: Evaluation of a security’s risk and return characteristics.

Security Selection: The process of selecting individual securities, based on which are most appropriate for an investment portfolio. 

Segregated Fund: An insurance investment fund, similar to a mutual fund, that typically offers a principal guarantee. Units of segregated funds are purchased based on their net asset value, similar to a mutual fund. They are sometimes called variable deferred annuities.

Self-Regulatory Organizations (SROs): Non-governmental associations charged with oversight of securities industry companies and employees. The Mutual Fund Dealers Association (MFDA) is the SRO for the distribution side of Canada’s mutual fund industry. The Investment Industry Regulatory Organization of Canada (IIROC) is the SRO for Canada’s investment dealer firms. 

Serial Bond: A bond or debenture in which a predetermined amount of principal matures every year. 

Service Fee: A trailing commission, paid on an ongoing basis for servicing an investment holding.

Set-Up Fee: A one-time charge payable upon an initial purchase of some mutual funds.

Seven-Day Yield: A yield calculation that divides a fund’s ending net asset value by its initial net asset value over seven days, and then subtracts 1.

Shareholder: A person who owns shares of a company’s stock.

Shareholders’ Equity: The equity that remains after liabilities are subtracted from the assets. 

Sharpe Ratio: A common method used to determine risk-adjusted returns, calculated as the portfolio’s return minus the risk-free rate all divided by the portfolio’s standard deviation. 

Shelf Registration: New issue registration which only provides a simplified prospectus.

Short Position: A negative investment holding, created by an investor selling an investment that he or she does not own.  A short position would be entered if the investor expects the value of the investment to fall.  Negative positions are said to be short. Conversely, when an investor purchases an investment, the position is said to be long.

Short Selling: The action of selling securities that the investor does not own, designed to profit from the falling price of a stock, which is done by borrowing shares, selling them on the open market and later repurchasing the shares, hopefully at a lower price, and returning them to the shareholder. 

Short-Term Bond Fund: A fixed-income fund investing primarily in money market securities and government bonds with maturity dates of less than five years.

Simple Rate of Return: A rate of return calculated by dividing investment income and dividends by the original purchase price. This simple method ignores the effects of compounding. 

Simplified Prospectus: A requirement under National Instrument 81-101 to provide essential information about a mutual fund, including the fund’s investment objectives, risk factors, fees and method of distribution. 

Small Capitalization (Small Cap) Funds: Investment funds made up of equities issued by smaller companies with lower market values. As a result, small cap funds experience higher volatility and risk, but the opportunity for higher performance. 

Soft Landing: A phase of a business cycle when economic growth slows but does not turn negative and inflation remains low. This is the ideal scenario when an economy slows down.  

Sophisticated Investor: Clients, either individuals or institutions, that meet specific thresholds of investment knowledge, net worth and/or income. (Also called an Accredited Investor)

Source of Capital: Savings from retail, institutional, and foreign investors. 

Specialty Mutual Fund: A less diversified and therefore riskier mutual fund that invests in a specific industry, sector or type of security.

Speculator: An investor who seeks high returns by investing in riskier investments. 

Spousal RRSP: A Registered Retirement Savings Plan (RRSP) that allows one spouse to contribute into the other spouse’s account, providing tax savings opportunities through tax splitting. 

Stability: The opposite of volatility, an investment or portfolio of investments whereby the value experiences minimal fluctuations. 

Standard Deviation: The measure of volatility of a portfolio or individual investment, calculated as the square root of the variance. Based on historical volatility, standard deviation suggests the possible range of pricing outcomes in the future.  

Standard Equity Funds: Canadian common stock mutual funds that earn a combination of capital gains and dividend income.

Standard Trading Unit: Often called a Board Lot, a fixed number of shares, usually 100, that make up a trading unit.

Standards of Conduct: A behavioural code by which investment professionals are expected to abide.

Statement of Changes in Equity: A detailed financial statement showing the total income kept in a business each year. (Also called Statement of Retained Earnings)

Statement of Comprehensive Income: A detailed financial statement showing revenue expenses that result in either a profit or a loss.

Statement of Financial Position: A detailed financial statement showing the assets, liabilities and equity of a company on a specific date.

Statement of Investment Objectives: A statement that clearly outlines what a mutual fund’s portfolio mandate is, and therefore, what its manager can invest in. 

Status Quo: The current state of affairs, or the state of mind of individuals for keeping things as they are.

Stock: Represents an ownership interest in a company or corporation. Also called equities or shares, stocks have no maturity date and their value is based on the size and performance of the underlying company.  

Stock Exchange: A marketplace where investors buy and sell securities. 

A marketplace where buyers and sellers of stocks and other securities trade shares.

Strategic Asset Allocation: A mix of various investment classes consistent with an investor’s risk tolerance and based on calculations of expected performance within the capital markets. 

Structural Unemployment: A location-based phenomenon in which workers with specific skills do not live in places where their skills are in demand.

Style Analysis: The process of determining the investment style of an investment manager. (Also see Style Drift)

Style Drift: When an investment manager’s investment style alters subtly over time.

Suitability: A requirement that a registered representative incorporate all available information about a client and properly examine the specifics of a security to determine whether it is appropriate for an investor. In certain cases, such as when dealing with Accredited Investors, there are exemptions to the suitability requirement. 

Supply: The amount of a good or service available at a given price. 

Survivorship Bias: A bias caused when failed companies or investment funds are excluded from performance evaluations because they no longer exist. 

Switch Fee: A fee charged to an investor who switches from one mutual fund to another with the same company. Not all fund companies charge a transfer fee.

System for Electronic Document Analysis and Retrieval (SEDAR): An online repository of documents pertaining to all Canadian securities, including annual reports, information forms, and simplified prospectuses. 

Systematic Risk: A risk faced by all securities during falling markets or times of broad market swings or volatility.

Systematic Withdrawal Plan: A regular, automatic, withdrawal of investment units by an investor. The money is generally used to supplement a pension or other fixed income withdrawal.

T

T3 Statement: A Statement of Trust Income, Allocations and Designations, that reports investment income generated from trust accounts or mutual funds held in non-registered accounts for tax purposes. 

T5 Statement: A Statement of Investment Income, that reports investment income including interest, dividends and foreign income for tax purposes. 

Target-Date Fund: A mutual fund that shifts its portfolio from a risker investment mix to a more conservative mix over several years to coincide with the changing risk profile of investors as they age and their investment objectives change.

Tax-Free Savings Account (TFSA): A government sponsored savings plan that shelters investment income from tax while inside the account. Withdrawals from a TFSA are entirely tax free.

Technical Analysis: An approach to analyzing securities that uses market data and trends to identify investment opportunities.  

Term: The time to maturity for an asset or liability. For mortgages, it refers to the period of time before terms and conditions can be renegotiated. 

Term to Maturity: Time between a fixed-income security’s issuance and the date at which the principal is repaid.

Terrorist Financing: Activities that provide financing or financial support to individual terrorists or terrorist groups.

Time-Weighted Maturity: A way to measure how sensitive a bond or bond portfolio is to interest rate changes. The lower the duration, the smaller the change in bond value to changes in interest rates; and vice versa. (Also see Duration)

Time Weighted Return (TWR): A rate of return calculation, also called a geometric mean, which factors income and compounding into the equation for a more accurate measure of performance. Time-weighted portfolio returns focus on the returns for the investments themselves, and do not account for the timing of individual deposits and withdrawals from the investments.

Total Assets: The value of all assets owned by an individual such as investments and real estate, excluding any liabilities.  

Total Liabilities: The total amount of debt that an individual or business owes. This includes unpaid bills, loans and mortgages on property.

Tracking Error: The failure of an index fund or exchange traded fund (ETF) to accurately mirror the return of an index. 

Trading Costs: The brokerage fees and commissions paid to buy and sell securities within a portfolio or mutual fund. 

Trailer Fee: A fee that compensates mutual fund distributors for service provided to fund clients on an ongoing basis. This fee is included in the management expense ratio (MER). (Sometimes called a Trailing Commission).

Transfer Agent: An entity, normally a trust company, responsible for keeping ownership records for a mutual fund’s units.

Transfer Fee: A fee charged to an investor who switches assets from one mutual fund company to another.

Treasury Bill (T-Bill): A government issued short-term debt security that does not pay interest, rather it is sold at discount for redemption for a face value (par) at maturity.

Trend Ratio: Analysis used to spot trends and compare companies by evaluating financial statement information over several time periods.

Trust Deed: For a mutual fund, this declaration of trust outlines the fund’s principal investment objectives, investment policy, restrictions, custodial details and fund structure. For bonds, this formal document outlines the agreement details between the bondholder and bond issuer. 

Trustee: An appointed entity, often a trust company, to protect the security behind the bonds and to make certain the deed’s covenants are honoured. In the case of a segregated fund, it’s the entity which administers the fund’s assets.

Trustee Fee: A fee charged for acting as a trustee and overseeing the management and distribution of the trust assets. 

Trustworthiness: A character trait defined by desire to do right by others.

Turnover Rate: The percentage of a fund’s total assets traded during a year.

U

Underwriting: The process by which and investment dealer buys a new equity investment and then bears the risk of selling it for a desired price when it is brought to market. In the case of a “Best Efforts Underwriting,” the dealer does not guarantee a partial or complete sale of the offering.

Unemployment Rate: The percentage of the population in the labour force currently not working. It is calculated by dividing the number of unemployed by the number of people in the labour force. 

Unique Risk: The risks associated with a specific investment irrespective of overall market performance. Portfolio diversification is designed to protect investors from unique risks, also referred to as unsystematic risk. 

Unsolicited Orders: An order to buy or sell an investment initiated by a client, and not by the advisor.

Users of Capital: Companies, governments and individuals that spend savings, borrow or, raise money by issuing shares.

V

Value Investing: An investment strategy focused on investing in companies with share prices considered to be undervalued. Value investing requires extensive research before stocks are purchased and often involves a long-term, buy and hold approach. 

Value Ratios: Ratios used to measure the value of a company’s shares and compare with other companies. (see also Market Ratios)

Variability: Change to an investment’s returns over a given time period.

Variable Annuity: An insurance product in which payments to the contract holder shift periodically based on changes to the value of the underlying investments from which payments are drawn. 

Variance: The degree of difference between the possible return and the expected return.

Vested: Contributions within an employer-sponsored pension plan or stock incentive plan that belong to an employee.

Volatility: The measure of the shift in returns in relation to the market average or mean return. Volatile investments are those that experience larger or more rapid changes, and are therefore riskier for clients. 

Voluntary Accumulation Plan: A mechanism that allows an investor make automatic and periodic purchase of units of an investment. (Also see Pre-Authorized Investment Plan)

W

Wealth: The measure of value of all assets, including savings, investments and real estate, owned by an individual, minus any liabilities or debt.

Whipsaws: Violent intraday price swings resulting in short-term losses or gains for a trader.

Working Capital: A measure of a company’s short-term financial health measured as total current assets minus current liabilities.

Working Capital Ratio: A calculation that determines a company’s liquidity by dividing its current assets against current liabilities. (See also Current Ratio)

Y

Yield: The expected rate of return of an investment. For bonds, the yield considers the current bond price and coupon payments until maturity. (See also Current Yield and Effective Yield)

Yield Curve: A graph displaying the relationship between bonds whose yields are of the same quality but mature at different times. A yield curve normally slopes upward to show that short-term investments usually have a lower yield than their longer-term counterparts. When short-term funds become more expensive, the yield curve is said to invert.

Yield to Maturity: The return of a bond over its life, assuming periodic coupon payments are reinvested until the bond matures. This accounts for the par value, coupon rate, time to maturity and market price.