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Financial terms

Need clarity on an investment or financial term you’ve heard or read about? Below are some common terms defined in plain language.

To find your definition simply click on the letter that your investment or financial term starts with.

Account Statement

An online or paper record of transactions in an account at a financial institution or investment firm, generally provided monthly.

Accredited Investor

A government, financial institution, large company or individual with a required level of income or assets, permitted to invest in certain types of securities sold without a prospectus.

Affinity Fraud

A type of investment fraud that exploits the trust and friendship that exists in groups of people who have something in common, such as religious or ethnic communities, social clubs or professional groups. The fraudsters who promote affinity scams frequently are – or pretend to be – members of the group. They often enlist respected leaders (who may be unsuspecting victims) from within the group to spread the word about the scheme, by convincing them that a fraudulent investment is legitimate and worthwhile. The resulting sense of affinity and trust allows fraudsters to more effectively lure their victims into a fraudulent investment.

Annual Information Form (AIF)

An AIF is required to be filed annually by certain companies under Part 6 of National Instrument 51-102. It is intended to provide material information about a company and its business at a point in time in the context of its historical and possible future development. An AIF describes the company, its operations and prospects, risks and other external factors that impact the company specifically.

Assets

Assets are everything you own that has any monetary value, plus any money you are owed.

Bear Market

A period when the value of the securities market, or a sector of the securities market, is generally declining.  It is a transition from high investor optimism to widespread investor fear and pessimism.  A bear market should not be confused with a correction, which is a short-term trend that has a duration of less than two months.

Beneficiary

A beneficiary is the person or organization who receives assets that are held in your name in a retirement plan, or are paid on your behalf by an insurance company after your death.

Binary Options Scam

Binary options are like bets on how an asset (currency, stock, etc.) will perform in a limited amount of time – they are “all or nothing” wagers, similar to gambling. Even when investors see virtual gains, they often cannot access these profits as they don’t exist. Typically luring victims through enticing online ads, emails or social media, binary options trading platforms promote higher than average returns for a small amount of work. Investors are required to create a trading account, supply their credit card and other personal information, and make an initial deposit before they start trading.

Bond

Bonds are debt securities issued by corporations and government.

Budget

A budget is a written record of income and expenses during a specific time frame, typically a year.

Bull Market

A period when the value of the securities market, or a sector of the securities market, is generally rising.

Capital

Money that is used to generate income or make an investment.

Capital Gain

An increase in the money value of a capital asset such as an investment or other asset, which results in a profit if the asset is sold. For example, if a share is bought at $26 and sold at $30, there is a capital gain of $4.

Capital Loss

The money you lose when you sell an investment or other asset for less than you initially paid to purchase it. For example, if a share is bought at $30 and sold at $26, there is a capital loss of $4.

Commodity

A basic good that is used in commerce that is interchangeable with another similar product. Commodity prices are subject to supply and demand. Examples include grain and oil.

Common Share

A share in the ownership of a company, giving the holder a vote in the election of directors and some other major corporate decisions.

Compound Interest

Money that you earn on interest from a previous period. For example, if you invest $100 at an annual interest rate of 5%, it will grow by $5 to $105 after one year. In the next year, at 5%, it will grow to $110.25. The extra 25 cents is interest earned on the previous interest. It might not seem like much, but the compounding increases each year and becomes quite significant over time.

Debt

The money that you owe to a lender (for example a bank) when you borrow money.

Diversification

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

Dividend

A payment made by a company to its shareholders from the company’s profits. For common shares, the dividend can vary with the financial success of the company. Dividends can generally be raised, lowered or discontinued at the discretion of the company’s board of directors.

Earnings Per Share

The amount of profit earned by a company during a period per share of common stock. It is calculated by dividing net income by the total number of shares outstanding during the period.

EBITDA

Earnings before interest, taxes, depreciation and amortization. EBITDA is one way to analyze and compare profitability among companies.

Equity

The ownership interest of the shareholders (common and preferred) of a company. Shares of a company can be referred to as equities.

Exchange-Traded Fund (ETF)

A fund that holds the same mix of investments as a stock or bond market index and trades on a stock exchange.

Exempt Market

A market where private companies sell their securities under various exemptions from the prospectus requirement to investors that meet specific criteria in National Instrument 45-106 Prospectus and Registration Exemptions.

Financial Adviser

A person who offers advice about buying or selling investments.

Financial Plan

A written plan that helps investors identify their short and long-term financial goals and determine how to best manage their money to achieve them.

Financial Planner

A person who determines how individuals can meet their goals through proper management of their financial resources. They offer financial services such as budgeting, cash and debt management, retirement and tax planning. Financial planners cannot trade securities or recommend investments to their clients unless they are registered with the provincial securities regulator in their province.

Financial Statements

A formal record of a company’s financial activities for a period of time, usually including a statement of financial position or balance sheet, statement of comprehensive income or income statement, cash flows or a cash flow statement, and notes.

Fixed Income Securities

Investments that pay a pre-determined rate of interest or dividend income such as government and corporate bonds, debentures and preferred shares.

Foreign Exchange (FOREX) Trading

Investing in different currencies to make money on the changes in exchange rates. Also known as FX trading.

Forex Scam

Also referred to as FX or foreign exchange, Forex is essentially the trading of foreign currencies. Victims of Forex scams are often solicited through online or newspaper ads describing Forex trading as a quick and easy way to make large profits, when in reality it’s a complicated process requiring professional training and experience using very advanced software. The scams typically guarantee little or no risk and high returns and are often offered by unregistered dealers based outside of Canada.

Fund Facts

A document that fund managers are required to provide for each mutual fund that they create. Each Fund Facts is in plain language, no more than two pages double-sided and highlights key information for investors, including past performance, risks and the costs of investing in the mutual fund. Dealers must provide Fund Facts to their clients before the client invests in the fund.

Fund Manager

A company that oversees securities. The fund manager oversees the operation of investment funds, including deciding which securities to purchase, and in what quantities, and when to buy and sell the securities. These decisions are based on the stated objective and strategy of the fund. An investment fund offers investors a wider selection of investment opportunities, management expertise and lower investment fees than investors could access on their own.

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Hedge Funds

An investment pool that uses advanced investment strategies that are not generally permitted for traditional mutual funds, such as the use of derivatives.

Hedging

An investment strategy that uses one investment to offset the risk of another investment. While hedging in investing is generally considered an advanced strategy, a more relatable example of (non-investment) hedging is insurance. When you take out insurance to reduce the risk that an injury will reduce your income because of an inability to work, this is a hedge.

Income Statement

A financial statement that measures a company’s financial performance by summarizing revenues and expenses for a specific period of time.

Index Fund

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

Inflation

A general increase in the price of goods and services and a fall in the purchasing value of money.

Interest

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

Interest Rate

When you are borrowing money, interest rate refers to the price lenders charge you when you use their money for a specified period of time. The rate charged is usually expressed as a percentage of the total amount borrowed. When you are depositing money, interest rate refers to the amount of money a deposit will earn over the length of time it is deposited. The rate earned is usually expressed as a percentage of the total amount deposited.

Investment

A way to put your money to work in the expectation that it will provide income, increase in value or both.

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Know your Client (KYC) Rule

This requirement ensures that advisers know detailed information about their clients’ risk tolerance, investment knowledge and financial position. This information is collected on forms and is designed to protect both clients and advisers.

Liquidity

The ability to sell an investment quickly and at a fair price.

Management Expense Ratio (MER)

The management expense ratio (MER) is the total of the management fee and operating expenses expressed as a percentage of the fund’s value. Funds show their MER as a percentage of the fund’s assets.

Management Fee

A service fee you pay the manager of your investments to manage the risk inherent in your portfolio.

Management’s Discussion and Analysis (MD&A)

The section of a quarterly or annual financial report in which the issuer’s management comments on its financial results.

Market Capitalization

The value of a company that is traded on the stock market, calculated by multiplying the total number of shares by the present share price.

Money Market Fund

Mutual fund that invests in short-term fixed income debt securities, including commercial paper (representing a short-term loan to a corporation) and treasury bills (T-bills), all generally referred to as money-market instruments. Money market funds are usually issued at a fixed price. The return you receive will vary depending on the investments the fund holds.

Mortgage-backed Security

An investment and lending company that purchases mortgages for investment purposes.

Mutual Fund

A pool of money that’s invested for a large number of investors by a professional money manager. A mutual fund is the most common type of investment fund.

National Registration Database (NRD)

A tool for investors to see if an adviser is registered. In Canada, anyone in the business of trading securities or advising clients on securities must be registered with the securities regulator in each province or territory where they do business, unless an exemption applies.  Visit https://aretheyregistered.ca.

Net Income

A measure of a company’s profitability. To calculate net income for a business, start with a company’s total revenue. From this figure, subtract the businesses expenses and operating costs to calculate the business’s earnings before tax. Deduct tax from this amount to find the business’s net income.

Net Worth

The total amount of your assets, including the money in your accounts, your investments, and personal property such as home, car or business, minus any outstanding debts you have.

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Ponzi Scheme

A type of scam in which investors are promised high rates of return with little to no risk, however there is no legitimate investment. To keep the scheme running, some investors may initially see returns, making it believable and sustainable. These returns are actually coming from other investor’s money. Eventually investments and new investors will cease, and with no money coming in, the scheme will collapse and investors are typically left with nothing.

Portfolio

All the securities which an investment company or an individual investor owns.

Portfolio Manager

A person who is authorized to make discretionary trades for you. Sometimes investors allow their portfolio manager to make discretionary trades on their behalf.

Preferred Share

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

Principal

The money originally invested or lent to earn interest or other income.

Private Placement

When a company issues securities privately rather than offering them to the public. The offering does not include a formal prospectus and the shares do not trade publicly on a stock exchange.

Prospectus

A formal document required by law when a company wants to sell shares to the public.

Pump-and-dump Scheme

A potential investor receives an email or a call promoting or “pumping” an incredible deal on a low-priced stock. What investors may not know is that the promoter likely owns much of this stock. As more investors buy shares, the value of the stock skyrockets. Once the share price hits a peak, the scam promoter sells or “dumps” their own shares and the value of the stock plummets, leaving investors with worthless shares.

Pyramid Scheme

Scam based on a hierarchical or “pyramid” structure. Participants actively promote the scheme and try to make money solely by recruiting new participants into the program. Recruiters move up the “pyramid” as new investors buy in. When new participants slow or cease to exist, the scheme loses steam and collapses. To attract new investors, recruiters will guarantee high returns and disguise the scam as legitimate. However, the majority of those who invest in pyramid schemes lose their investment.

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Real Estate Investment Trust (REIT)

A publicly traded trust that invests in real estate through properties or mortgages.

Recovery Room Scams

A person who has been the target of a scam may be targeted again, because the person who defrauded the individual the first time may keep their information or sell it to another scam artist or criminal organization. After some time has passed, they are contacted again, either by the first scam artist or by someone else. They will offer to buy the shares purchased in the initial scam at an inflated price. In order to receive the money, investors are instructed to first pay a fee for this service/transaction. Once the fee is paid, the scam artist takes the money and runs – the victim has been scammed again.

Registered

Advisers and investment companies licensed by a securities regulator to buy and sell investments, or provide investment advice. Also, accounts and retirement plans protected by income tax and other laws.

Registered Retirement Savings Plan (RRSP)

A type of savings plan registered with the government that allows you to reduce the income tax you pay on money you save for retirement. Any income you earn in the RRSP is usually exempt from tax for the time the funds remain in the plan. During retirement, an RRSP can be another source of income for you.

Return

The profit you make on an investment through interest, dividends or increased value of the investment (see expected return).

Risk

Amount of uncertainty about the expected return from an investment, including the possibility that the investment may lose money or become worthless.

Risk Tolerance

How willing or comfortable you are to risk losing your money on an investment.

Rule of 72

A way to quickly estimate how long it will take an investment to double in value at a given annual rate of return.

Securities

Transferable certificates of ownership of investment products including bonds, notes, stocks, future contracts and options.

Shareholders’ Equity

The amount of a corporation’s assets belonging to its shareholders (both common and preferred) after allowance for any prior claims.

Stock Exchange

A building or online market where stocks and shares are traded publicly.

Stocks

Holding shares means having part-ownership of a company. The terms share and stock are often used interchangeably.

Tax-Free Savings Account (TFSA)

A registered savings plan that allows you to earn tax-free investment income and capital gains on money contributed up to a set annual limit.

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Volatility

The degree and speed of changes in an investment’s value over a given period of time. Investments that change in value gradually, or minimally, are said to have lower volatility than those that change rapidly or significantly and frequently during the same time period. Volatility is usually measured historically – how an investment has acted in the past – and that behaviour suggests how the investment may behave in the future, although no one can predict the future.

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Yield

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

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