Financial terms made easy

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Planning for the future is never easy, and sometimes sorting through all the terminology you see in the business section can be daunting. To help, we offer this glossary of terms used by investors, advisors, and other people who deal with money and planning on a daily basis.

Active Management
A strategy that tries to capture price gains by buying investments that a manager believes have more underlying worth than their current price. This approach requires careful timing of when investments are bought and sold.

Annuity
An income stream paid out by a life insurance company. Payments happen over set time periods, or until the policyholder dies. The word also describes a type of insurance policy that pays out this income stream. An Annuitant holds the annuity and receives the income stream.

Asset(s)
Anything that has value. For an investment company, this can be shares in a company, or bonds, or the physical assets a company owns. Personal property, such as a house or condominium, also is called an asset by financial advisors and planners.

Asset Allocation
A combination of assets in an investor’s portfolio. Financial advisors will often refer to this in percentage terms — for example, saying that you hold 50% of your assets in stocks, 40% in bonds and 10% in cash.

Average Return
A number you get when you add up how much more an investment is worth when compared with the price you first paid, and then divide the difference by the number of years you held that investment.

Balanced Mutual Fund
Fund that spreads out an investor’s risk by combining bonds, cash, stocks and other investments from a variety of economic sectors and geographic regions.

Bear Market
A period during which investments, like stocks or bonds, lose value.

Benchmark Index
The Dow Jones Industrial Average is one example of an index used to measure the performance of investment markets. Others include the TSX/S&P and the Nasdaq Composite.

Beneficiary
The person who receives the funds from an insurance policy or other investment.

Bond
Debt issued by governments or companies. Bonds are typically issued at fixed interest rates and require the issuer to repay investors after a set period of time. A Bond Fund is comprised exclusively of bonds and is sometimes called a Fixed-Income Fund.

Budget
A calculation of how much you spend each month, compared against how much money you bring home.

Bull Market
A period during which the value of investments, like stocks or bonds, goes up.

CPP
The Canada Pension Plan is available to all employed or self-employed Canadians in provinces outside Quebec. Quebec has its own plan called the QPP.

Capital
Cash or other assets that can be used to buy stocks, bonds, real estate or other things of value.

Capital Gain
The return, some of which is taxed, that is earned when selling an investment that has increased in value. When investors lose money, that’s called a Capital Loss.

Common Stock
Shares of ownership in a company that’s traded on a stock exchange. Prices of common stock shares change constantly based on what people are willing to pay. By contrast, Preferred Stock shares have a base value that the company is required to refund to shareholders if the company ceases operations or liquidates.

Compounding
The interest you earn on an investment or within a bank account when you reinvest, rather than spend. That money is said to compound because the interest builds faster.

CPI
The Consumer Price Index averages the cost of a variety of services and goods people buy.

Contribution Room
How much money you can put into an RRSP or TFSA each year. Contribution room can be carried to the next year if you don’t use all of it.

Correlation
How the returns from one investment are tied to those of a different investment. Different economic sectors, such as agriculture and manufacturing, may be correlated to one another.

Coupon Rate
The interest rate on a bond. When a government or company issues a bond, it agrees to pay an agreed-upon interest rate to the buyer. At one time, a paper tab called a coupon showing the interest rate was attached to the bottom of the bond certificate, and the name stuck.

Death Benefit
Money paid to people named as beneficiaries of an insurance policy, or in the case of an investment, to a named person or the estate of the deceased.

Defined Benefit Plan
Usually an employer-sponsored pension plan that lets you determine how much monthly income you are entitled to receive after retiring. A Defined Contribution Plan bases that monthly sum on how much you contribute while working.

Diversification
A process that spreads investments out by type (stocks, bonds, etc.), economic sector (technology, consumer goods, etc.) and the region where investments are made (within Canada, globally, etc.) to reduce the risk that poor economic performance in one region or sector may cause harm to the entire portfolio.

Dividends
When you own shares of stock (either Preferred or Common), you may get income in the form of dividends. They are paid to the shareholder.

Economic Indicators
Government statistics showing how a country’s economy is performing.

Equities
Stocks or other shares of ownership in a company.

ETFs
Exchange-Traded Funds are investment products that mimic many popular stock indexes like the TSX/S&P.

Financial Planner
Sometimes called an Investment Advisor, these professionals help people select investments that are suitable for their financial circumstances and the length of time before they plan to retire.

Fiscal Year
A 365-day period that a corporation or business uses for its internal accounting. Often tied to the day and month when a company began doing business, it may or may not match up with the calendar year.

Fixed Income
Investments, and sometimes funds, made up of bonds and other financial instruments that earn returns at a predetermined rate.

GICs
Guaranteed Investment Certificates are primarily sold by banks and pay a set rate of interest for a specific time period (six months, one year, two years, etc.). Interest rates are generally a bit higher than what a bank offers for its standard savings accounts. Cashing in a GIC early can result in a penalty.

Income
How much you earn from an employer or, for the self-employed, from a business you own and run. Financial advisors may refer to money that’s left over after you’ve paid your bills as Discretionary Income. Income also can be earned from your investments. Interest Income is earned from bonds, bond funds, fixed-income funds or GICs.

Inflation
When prices for food, shelter, housing and other things increase over a period of time. The opposite is deflation – which rarely happens.

IPO
An Initial Public Offering is when shares of a company go up for sale to the public on the open market for the first time.

Institutional Investor
An organization that invests money in the interests of a larger group – like a pension fund.

Investment Dealer
A stockbroker or other securities firm.

Investment Horizon
The time between now and when you will need the money from your investments. For most people, their Investment Horizon extends to when they retire. Also called a Time Horizon.

Investment Portfolio
Combination of stocks, bonds or other securities designed to earn money for investors. A Portfolio Manager selects and oversees the investments that go into the investment portfolio.

Life Annuity
An insurance product that pays the owner a specific amount of income (usually monthly) for as long as he or she lives.

Life Insurance
A financial instrument that pays your heirs a set sum of money upon your death.

Liquidity
How easy it is to sell an investment at the current market price.

MER
A Management Expense Ratio is a number calculated based on costs (called Management Fees) to operate a mutual fund, including fees paid to the fund’s managers.

Maturity Date
When a bond must be paid to its owner at full value.

Money Market
A fund that invests in low-risk financial instruments, such as government bonds.

Mutual Fund
A portfolio of investments that’s divided into units, giving buyers access to all of the fund’s holdings. Mutual funds have managers who buy and sell the investments it holds.

OAS
Old Age Security is monthly income paid to those over age 67 who are living in Canada.

RESP
A Registered Education Saving Plan lets parents or grandparents defer tax when saving for a child’s education. The government also kicks in 20% of what you pay into the account (up to defined limits) each year through a program called the Canada Education Savings Grant.

RPP
Some employers set up Registered Pension Plans to help their workers retire. Contributions are tax deductible and employers generally contribute a portion of the funds that go into the plan. Upon retirement, an RPP is converted to a LIF (Life Income Fund).

RRSP
A Registered Retirement Savings Plan lets Canadians invest part of their annual income and not pay tax on the returns until they retire. Annual contribution limits are set by Ottawa. After retirement, an RRSP is converted to a RRIF (Registered Retirement Income Fund).

Return
What you receive back from an investment as interest or dividends. Also called ROI (Return on Investment).

Risk Tolerance
Your ability to cope with upward and downward movement in the prices of your investments.

Savings
Funds set aside for future needs. You can use savings for short-term needs, like a new roof or car, or for longer-term goals, like educating children or for your retirement.

Securities
Usually stocks and bonds, but sometimes shares in other investments of value.

Segregated Fund
A specialized mutual fund that’s linked to an annuity or other insurance policy. A Variable Annuity, which pays an income to the holder based on the value of the fund investment, is a type of Segregated Fund.

Shareholder
Someone who owns stock shares issued by a corporation.

Stock
Share in the ownership of a corporation.

Stock Exchange
Place where stocks and bonds, and sometimes other investments, are bought and sold. They ensure the prices of investments reflect the supply and the public demand – or lack thereof.

TFSA
A Tax-Free Savings Account is offered by a financial institution (a bank or other investment dealer) and lets the owner invest $5,500 each year, while sheltering proceeds from those investments from tax. Unlike an RRSP, it’s easier to withdraw from a TFSA before retirement.

Trading Costs
Fees and commissions that brokers charge to buy and sell stocks, bonds and other investments.

Volatility
A period when the value of investments moves up or down rapidly, and sometimes unexpectedly.

Yield
Investment returns over time.

CPP Investment Board, investing today for your tomorrow.

The content on this site is provided for information purposes only. CPPIB is not a financial advisor, and the content on this site does not provide financial advice. Every person’s financial planning needs are different. For advice on how you should prepare financially for retirement, please consult a credentialed professional financial advisor.

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