Accidental Death And Dismemberment Insurance – AD&D :
A rider attached to a life or insurance policy. AD&D covers death by accidental means (rather than natural causes) and dismemberment, which includes loss of the use of certain body parts (including limbs or eyesight.) These riders are usually written in such a way that the insurer must pay double the amount payable otherwise, or a specific amount of continuous income payments, and are sometimes called double indemnity riders. AD&D insurance is often offered by employers as an extra option on group health plans.
Accreted Value :
The value, at any given time, of a multi-year instrument that accrues interest but does not pay that interest until maturity. The most well-known applications include zero-coupon bonds or cumulative preferred stock.
Accrued Expense :
An accounting expense recognized in the books before it is paid for. It is a liability, ans is usually current. These expenses are typically periodic and documented on a company’s balance sheet due to the high probability that they will be collected.
Accrued Interest :
- A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, but not yet paid or received. Accrued interest occurs as a result of the difference in timing of cash flows and the measurement of these cash flows.
2. The interest that has accumulated on a bond since the last interest payment up to, but not including, the settlement date.
Active Management :
The use of a human element, such as a single manager, co-managers or a team of managers, to actively manage a fund’s portfolio. Active managers rely on analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold and sell. The opposite of active management is called passive management, better known as “indexing“.
Adjustable-Rate Mortgage – ARM :
A type of mortgage in which the interest rate paid on the outstanding balance varies according to a specific benchmark. The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month. The interest rate paid by the borrower will be based on a benchmark plus an additional spread, called an ARM margin.
An adjustable rate mortgage is also known as a “variable-rate mortgage” or a “floating-rate mortgage”.
Ad Valorem Tax:
The phrase ad valorem is Latin for “according to value”. In the case of municipal property taxes, property owners have their property assessed on a periodic basis by a public tax assessor. The assessed value of the property is then used to compute an annual tax, which is levied on the owner by his or her municipality. Ad valorem taxes are incurred through ownership of the asset, in contrast to transactional taxes such as sales taxes, which are incurred only at the time of transaction. Imported/costly items can also be applicable.
Adjusted Cost Base – ACB :
An income tax term that refers to the change in an asset’s book value resulting from improvements, new purchases, sales, payouts or other factors. The book value can be adjusted because of a change or improvement made to the asset. The new adjusted cost base is then used to compute the gain or loss when it is sold. In some jurisdictions, the adjusted cost base must be used as the cost of the asset for capital gains.
- The paying off of debt in regular instalments over a period of time.
2. The deduction of capital expenses over a specific period of time (usually over the asset’s life). More specifically, this method measures the consumption of the value of intangible assets, such as a patent, copyright or a mortgage.
- A person who receives the benefits of an annuity or pension.
2. The person upon whom a life-insurance contract is based.
Annuitization Method :
A type of annuity distribution structure that gives the annuitant periodic income payments for the rest of his or her life, or a specified period of time. This is different than the systematic withdrawal method, with which the annuitant chooses the amount he or she would like to receive each month, which he or she receives until the amount in the account runs out.
A financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Annuities are primarily used as a means of securing a steady cash flow for an individual during their retirement years.
Asset Allocation :
An investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. The three main asset classes – equities, fixed-income, and cash and equivalents – have different levels of risk and return, so each will behave differently over time.
An asset that is not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets in today’s marketplace. An intangible asset can be classified as either indefinite or definite depending on the specifics of that asset. A company brand name is considered to be an indefinite asset, as it stays with the company as long as the company continues operations. However, if a company enters a legal agreement to operate under another company’s patent, with no plans of extending the agreement, it would have a limited life and would be classified as a definite asset.
An asset that has a physical form such as machinery, buildings and land.
Assumable Mortgage :
A type of financing arrangement in which the outstanding mortgage and its terms can be transferred from the current owner to a buyer. By assuming the previous owner’s remaining debt, the buyer can avoid having to obtain his or her own mortgage.
At Par :
A term that refers to a bond, preferred stock or other debt obligation that is trading at its face value. The term “at par” is most commonly used with bonds.
A bond that trades at par will have a yield equal to its coupon, and investors will expect a return equal to the coupon for the risk of lending to the bond issuer. Bonds are quoted at 100 when trading at par.
Attribution Rules :
A set of rules created by Canada Revenue Agency (CRA) that prevents investors from transferring assets between family members with the intention of avoiding taxes.
- An unbiased examination and evaluation of the financial statements of an organization. It can be done internally (by employees of the organization) or externally (by an outside firm).
2. An CRA examination of a taxpayer’s return or other transactions. The CRA performs this examination to verify the accuracy of these filings.
The interest a person or trader shows in buying or selling a bond. A trader may have specific interest in a certain type of bond based on his or her existing positions.
Back-End Load :
A fee (sales charge or load) that investors pay when selling fund shares within a specified number of years, which usually ranges between five to ten years. The fee amounts to a percentage of the value of the share being sold. The fee percentage is highest in the first year and decreases yearly until the specified holding period ends, at which time it drops to zero. Also known as a “contingent deferred sales charge or load.”
A negotiable promissory note issued by a bank and payable to the bearer on demand. The amount payable is stated on the face of the note. Banknotes are considered legal tender, and, along with coins, make up the bearer forms of all modern money. Also known as a “bill” or a “note.”
A legal proceeding involving a person or business that is unable to repay outstanding debts. The bankruptcy process begins with a petition filed by the debtor (most common) or on behalf of creditors (less common). All of the debtor’s assets are measured and evaluated, whereupon the assets are used to repay a portion of outstanding debt. Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations incurred prior to filing for bankruptcy.
A bond investment strategy that concentrates holdings in both very short-term and extremely long-term maturities. This is also known as the “dumbbell” or “barbelling.”
Basis Point – BPS :
A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security.
B/C Loan :
A classification of loans associated with the borrowers that have tainted or limited credit histories. Generally, B/C refers to any loan that is classified as sub prime, or a “B” or “C” class loan. Within the sub prime sector borrowers are graded according to their credit history. Different lenders have different grading systems based on different credit requirements. One sub prime lender might have a grading system with classifications designated as A to C minus, while another sub prime lender might have a grading system with classifications designated as Premium to C which all fall within the sub prime sector.
Beacon Score :
A number that is generated by the Equifax Credit Bureau to rank the credit-worthiness of individuals. Beacon scores are credit scores, which are determined through a complex algorithm. These numbers tell the lender how likely the chance is that the borrower will repay the loan. When NextGen FICO Scores started being used the Beacon score was replaced with the Pinnacle Score. Mathematical criteria can include late payments, current debts, length of time account has been open, types of credit and new applications for credit.
An investor who believes that a particular security or market is headed downward. Bears attempt to profit from a decline in prices. Bears are generally pessimistic about the state of a given market.
Bear Market :
A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, which contributes to further pessimism. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor’s 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market.
A fixed-income instrument that is owned by whoever is holding it, rather than having a registered owner. Coupons representing interest payments are likely to be physically attached to the security and it is the bondholder’s responsibility to submit the coupons for payment. As with registered bonds, bearer bonds are negotiable instruments with a stated maturity date and coupon interest rate.
A standard against which the performance of a security, mutual fund or investment manager can be measured. Generally, broad market and market-segment stock and bond indexes are used for this purpose.
A person or entity named in a will or a financial contract as the inheritor of property when the property owner dies.
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Also known as “beta coefficient”. Beta is calculated using regression analysis, and you can think of beta as the tendency of a security’s returns to respond to swings in the market. A beta of 1 indicates that the security’s price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security’s price will be more volatile than the market. For example, if a stock’s beta is 1.2, it’s theoretically 20% more volatile than the market. Many utilities stocks have a beta of less than 1. Conversely, most high-tech NASDAQ-based stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk.
Black Monday :
One of the most notorious days in recent financial history. On October 19, 1987, the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning of a global stock market decline. By the end of the month, most of the major exchanges had dropped more than 20%.
Black Thursday :
Thursday, October 24, 1929, when the New York Stock Exchange plummeted, leading to the Great Depression of the 1930s.
Blue Chip :
A nationally recognized, well-established and financially sound company. Blue chips generally sell high-quality, widely accepted products and services. Blue chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which helps to contribute to their long record of stable and reliable growth.
Blue List :
A daily digest of municipal and corporate bond offerings, market commentaries, fixed-income statistics and other bond information. The blue list is used by bond investors to identify investment opportunities in the bond market.
A buzzword that refers to a benchmark used to evaluate a fund’s performance. The benchmark is an index that reflects the investment scope of the funds investment. Comparing a fund’s performance to a benchmark index gives investors an idea of how well the fund is doing compared to the market. Also known as “bogy”.
Boiler Room :
A place where high-pressure salespeople use banks of telephones to call lists of potential investors (known as a “sucker lists”) in order to peddle speculative, even fraudulent, securities. A boiler room is called as such because of the high-pressure selling.
A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and Canadian and foreign governments to finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.
Bond Laddering :
A portfolio management strategy and model for investing in fixed income that involves purchasing multiple bonds, each with different maturity dates, in order to achieve the following goals: A)- Decrease interest rate risk by holding both short-term and long-term bonds, thereby spreading risk along the interest rate curve. If rates are rising, as one bond matures the funds can be re-invested into higher yield bonds. B)- Decrease re-investment risk because as one bond in the ladder matures, the cash is re-invested, but it only represents a portion of the total portfolio. Even if prevailing rates at the time of re-investment are lower than the previous bond was returning, the smaller amount of reinvestment dollars mitigates the risk of investing a lot of cash at a low return. C)- Maintain steady cash flows to encourage regular saving for investors looking for an income-producing portfolio.
The environment in which the issuance and trading of debt securities occurs. The bond market primarily includes government-issued securities and corporate debt securities, and facilitates the transfer of capital from savers to the issuers or organizations requiring capital for government projects, business expansions and ongoing operations
A grade given to bonds that indicates their credit quality. Private independent rating services such as Standard & Poor’s, Moody’s and Fitch provide these evaluations of a bond issuer’s financial strength, or its the ability to pay a bond’s principal and interest in a timely fashion.
A record of all the positions that a trader is holding. This record shows the total amount of long and short position that the trader has undertaken.
Book Value :
- The value at which an asset is carried on a balance sheet. In other words, the cost of an asset minus accumulated depreciation.
2. The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities.
3. The initial outlay for an investment. This number may be net or gross of expenses such as trading costs, sales taxes, service charges and so on.
In the U.K., book value is known as “net asset value”.
A period of time during which sales or business activity increases rapidly.
Bridge Loan :
A short-term loan that is used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short-term (up to one year) with relatively high interest rates and are backed by some form of collateral such as real estate or inventory. Also known as “interim financing”, “gap financing” or a “swing loan”.
- An individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor.
2. The role of a firm when it acts as an agent for a customer and charges the customer a commission for its services.
3. A licensed real estate professional who typically represents the seller of a property. A broker’s duties may include: determining market values, advertising properties for sale, showing properties to prospective buyers, and advising clients with regard to offers and related matters.
- An economic cycle characterized by rapid expansion followed by a contraction.
2. A surge in equity prices, often more than warranted by the fundamentals and usually in a particular sector, followed by a drastic drop in prices as a massive sell off occurs.
3. A theory that security prices rise above their true value and will continue to do so until prices go into freefall and the bubble bursts.
If the eventual price that the order is executed at is higher than the price available when the order was submitted, the customer simply pays the higher price. On the other hand, if the execution price is lower than the price available when the order was submitted, the customer pays the higher price and the brokerage firm pockets the difference. Most often in stock investing.
Bucking The Trend:
It may be a bullish signal when a stock is able to resist a prevailing downtrend in its own industry or against the broad market. This suggests that investors are attracted to the stock despite negativity surrounding its competitors and peers.
An investor who thinks the market, a specific security or an industry will rise.
Bull Market :
A financial market of a group of securities in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market, but can be applied to anything that is traded, such as bonds, currencies and commodities.
1) A one-time lump-sum repayment of an outstanding loan, typically made by the borrower after very little, if any, amortization of the loan. This can also refer to a loan that requires a disproportionately large portion (or even all) of the loan to be repaid at maturity.
2) A slang term for a letter of rejection sent to a job applicant, informing the candidate that he or she has not been offered the job, has been denied an interview or some similar form of rejection.
A period of slowing mortgage prepayment within a mortgage backed security (MBS). This usually occurs after the mortgages start to mature. When some percentage of the underlying loans fail to prepay after an interest rate cycle, this is known as burnout. Those borrowers who did not refinance during the first interest rate cycle are less like to do so if interest rates drop again. The rate at which the underlying loans of an MBS prepay is largely a function of current interest rates relative to the interest rates on the underlying loans. If current interest rates fall to a certain point below the interest rate on an existing mortgage, borrowers have an incentive to refinance. An MBS can go through several cycles of interest rates over its term. Prepayment risk is a substantial risk for investors in MBSs and investors look for MBSs with burnout because burnout lessens the prepayment risks.
Buy And Hold :
A passive investment strategy in which an investor buys stocks and holds them for a long period of time, regardless of fluctuations in the market. An investor who employs a buy-and-hold strategy actively selects stocks, but once in a position, is not concerned with short-term price movements and technical indicators.
- The period of time between the opening and closing of some future markets wherein the prices are established through an auction process.
2. An option contract giving the owner the right (but not the obligation) to buy a specified amount of an underlying security at a specified price within a specified time.
Call Premium :
- The dollar amount over the par value of a callable fixed-income debt security that is given to holders when the security is called by the issuer.
- The amount the purchaser of a call option must pay to the writer
Canada Pension Plan – CPP :
One of three levels of Canada’s retirement income system, which is responsible for paying retirement or disability benefits. The Canada Pension Plan was established in 1966 to provide a basic benefits package for retirees and disabled contributors. If the recipient dies, survivors receive the plan’s provided benefits. The CPP pays a monthly amount, which is designed to replace about 25% of the contributor’s earnings on which initial contributions were based, and is indexed to the Consumer Price Index.
Canada Revenue Agency – CRA :
Formerly known as “Revenue Canada“, this is Canada’s federal agency responsible for income tax and trade regulations.
Capital Gain :
- An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short term (one year or less) or long term (more than one year) and must be claimed on income taxes. A capital loss is incurred when there is a decrease in the capital asset value compared to an asset’s purchase price.
2. Profit that results when the price of a security held by a mutual fund rises above its purchase price and the security is sold (realized gain). If the security continues to be held, the gain is unrealized. A capital loss would occur when the opposite takes place.
Capital Loss :
The loss incurred when a capital asset (investment or real estate) decreases in value. This loss is not realized until the asset is sold for a price that is lower than the original purchase price.
- In accounting, it is where costs to acquire an asset are included in the price of the asset.
2. The sum of a corporation’s stock, long-term debt and retained earnings. Also known as “invested capital”.
3. A company’s outstanding shares multiplied by its share price, better known as “market capitalization”.
Cash Surrender Value (CSV):
The sum of money an insurance company will pay to the policyholder or annuity holder in the event his or her policy is voluntarily terminated before its maturity or the insured event occurs. This cash value is the savings component of most permanent life insurance policies, particularly whole life insurance policies. Also known as “cash value”, “surrender value” and “policyholder’s equity”.
Casino Finance :
Any investment strategy that is classified as extremely high risk.
Certificate Of Deposit – CD :
A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC. The term of a CD generally ranges from one month to five years.
Cats And Dogs :
A slang term referring to speculative stocks that have short or suspicious histories for sales, earnings, dividends, etc. The origin for this term may have stemmed from the use of “dog” to refer to an underperforming stock. In a bull market, analysts will often mention that everything is going up, even the cats and dogs. Therefore, during this time, new investors should not to be too overconfident in their stock picking ability, because even picking the most flawed investment could yield good returns – at least at first.
- An unethical practice employed by some brokers to increase their commissions by excessively trading in a client’s account. This practice violates the NASD Fair Practice Rules. It is also referred to as “churn and burn”, “twisting” and “overtrading”.
2. A period of heavy trading with few sustained price trends and little movement in stock market indexes.
- Purchasing certain investments provides taxable benefits contingent upon holding periods. When you sell these investments before they have maturity, the benefits must be returned. Applicable to OAS.
2. In Layman’s terms, a fall in a stock price right after an increase is called a claw back of the price.
A service charge assessed by a broker or investment advisor in return for providing investment advice and/or handling the purchase or sale of a security. Most major, full-service brokerages derive most of their profits from charging commissions on client transactions. Commissions vary widely from brokerage to brokerage.
Cold Calling :
A method used by brokers to obtain new business by making unsolicited calls to potential clients. Very ineffective.
Properties or assets that are offered to secure a loan or other credit. Collateral becomes subject to seizure on default.
Commercial Paper :
An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.
- A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.
2. Any good exchanged during commerce, which includes goods traded on a commodity exchange.
Common Stock :
A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company’s assets only after bondholders, preferred shareholders and other debt holders have been paid in full. In the U.K., these are called “ordinary shares”.
The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings. Also known as “compound interest”.
Consumer Price Index – CPI :
A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living. Sometimes referred to as “headline inflation”.
Contract Holder :
An owner of a segregated fund contract.
A phase of the business cycle in which the economy as a whole is in decline. More specifically, contraction occurs after the business cycle peaks, but before it becomes a trough. According to most economists, a contraction is said to occur when a country’s real GDP has declined for two or more consecutive quarters.
Contingent Beneficiary :
- A beneficiary specified by an insurance contract holder who will receive the benefits if the primary beneficiary has died at the time the benefit is to be paid.
2. A beneficiary who is only entitled to insurance proceeds if predetermined conditions have been met at the time of the insured’s death (as can be found in a will).
“Cook The Books :”
A buzzword describing fraudulent activities performed by corporations in order to falsify their financial statements. Typically, cooking the books involves augmenting financial data to yield previously non-existent earnings. Examples of techniques used to cook the books involve accelerating revenues, delaying expenses, manipulating pension plans and implementing synthetic leases.
“ Cookie Jar Accounting :”
An accounting practice where a company uses generous reserves from good years against losses that might be incurred in bad years.
Corporate Tax :
A levy placed on the profit of a firm; at different rates for different levels of profits.
A reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index. Corrections are generally temporary price declines, interrupting an uptrend in the market or asset.
Cost Basis :
- The original value of an asset for tax purposes (usually the purchase price), adjusted for stock splits, dividends and return of capital distributions. This value is used to determine the capital gain, which is equal to the difference between the asset’s cost basis and the current market value. Also known as “tax basis”
2. The difference between the cash price and the futures price of a given commodity.
Cost Of Living Adjustment – COLA :
An adjustment made to CRA and supplemental security income in order to adjust benefits to counteract the effects of inflation. COLAs are generally equal to the percentage increase in the consumer price index for urban wage earners and clerical workers (CPI-W) for a specific period.
The interest rate stated on a bond when it’s issued. The coupon is typically paid semi annually. This is also referred to as the “coupon rate” or “coupon percent rate.
Credit Crunch :
An economic condition in which investment capital is difficult to obtain. Banks and investors become wary of lending funds to corporations, which drives up the price of debt products for borrowers.
Credit Rating :
An assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities.
Credit Risk :
The risk of loss of principal or loss of a financial reward stemming from a borrower’s failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt. Investors are compensated for assuming credit risk by way of interest payments from the borrower or issuer of a debt obligation. Credit risk is closely tied to the potential return of an investment, the most notable being that the yields on bonds correlate strongly to their perceived credit risk.
Credit Score :
A statistically derived numeric expression of a person’s creditworthiness that is used by lenders to access the likelihood that a person will repay his or her debts. A credit score is based on, among other things, a person’s past credit history. It is a number between 300 and 850 – the higher the number, the more creditworthy the person is deemed to be.
An entity (person or institution) that extends credit by giving another entity permission to borrow money if it is paid back at a later date. Creditors can be classified as either “personal” or “real”. Those people who loan money to friends or family are personal creditors. Real creditors (i.e. a bank or finance company) have legal contracts with the borrower granting the lender the right to claim any of the debtor’s real assets (e.g. real estate or car) if he or she fails to pay back the loan.
A stock index that represents 30 of the largest and most liquid German companies that trade on the Frankfurt Exchange. The prices used to calculate the DAX Index come through Xetra, an electronic trading system. A free-float methodology is used to calculate the index weightings along with a measure of average trading volume. The DAX was created in 1988 with a base index value of 1,000. DAX member companies represent roughly 75% of the aggregate market cap that trades on the Frankfurt Exchange.
A dealer differs from an agent in that a dealer acts as a principal in a transaction. That is, a dealer takes ownership of assets and is exposed to inventory risk, while an agent only facilitates a transaction on behalf of a client.
Death Benefit :
The amount on a life insurance policy or pension that is payable to the beneficiary when the annuitant passes away. Also known as “survivor benefit”.
A type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture.
An amount of money borrowed by one party from another. Many corporations/individuals use debt as a method for making large purchases that they could not afford under normal circumstances. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest.
A company or individual who owes money. If the debt is in the form of a loan from a financial institution, the debtor is referred to as a borrower. If the debt is in the form of securities, such as bonds, the debtor is referred to as an issuer.
A legal document that grants the bearer a right or privilege, provided that he or she meets a number of conditions. In order to receive the privilege – usually ownership, the bearer must be able to do so without causing others undue hardship. A person who poses a risk to society as a result of holding a deed may be restricted in his or her ability to use the property. Deeds are most known for being used to transfer the ownership of automobiles or land between two parties.
- The failure to promptly pay interest or principal when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment. Borrowers may default when they are unable to make the required payment or are unwilling to honour the debt.
2. The failure to perform on a futures contract as required by an exchange.
Deferment Period :
The period after the issue of callable security during which it cannot be called by the issuer.
Defined-Benefit Plan :
An employer-sponsored retirement plan where employee benefits are sorted out based on a formula using factors such as salary history and duration of employment. Investment risk and portfolio management are entirely under the control of the company. There are also restrictions on when and how you can withdraw these funds without penalties.
Also known as “qualified benefit plan” or “non-qualified benefit plan”.
Defined-Contribution Plan :
A retirement plan in which a certain amount or percentage of money is set aside each year by a company for the benefit of the employee. There are restrictions as to when and how you can withdraw these funds without penalties.
A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression.
Deferred Sales Charge/DSC :
A commission paid by an investor on his or her investment in a investment fund. The sales charge is paid to a financial intermediary (broker, financial planner, investment adviser, etc.) for selling the fund and is intended to provide compensation for the financial salesperson’s efforts in assisting clients in selecting the mutual funds best suited to their needs. Deferred simply refers to the amount the client would pay if the fund was to be cashed in or sold. Usually at a lesser rate based on the # of years the contract is in place. I.e. If cashed in in the 1st year of the purchase the investor would be charged 5-6% and 1% less every year after until the charge was 0%.(also called a declining sales charge.)
- In accounting, an expense recorded to allocate a tangible asset’s cost over its useful life. Because depreciation is a non-cash expense, it increases free cash flow while decreasing reported earnings.
2. A decrease in the value of a particular currency relative to other currencies
A severe and prolonged recession characterized by inefficient economic productivity, high unemployment and falling price levels.
A security whose price is derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage. Futures contracts, forward contracts, options and swaps are the most common types of derivatives. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region. Derivatives are generally used to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Euros.
Discount Broker :
A stockbroker who carries out buy and sell orders at a reduced commission compared to a full-service broker, but provides no investment advice.
- When trading volume is higher than that of the previous day without any price appreciation.
2. The removal of assets from an account. The assets are then paid to the retirement account owner or beneficiary.
3. A company’s payment of cash, stock or physical products to its shareholders.
4. Distributions of income and capital gains that mutual funds make to their investors periodically during a calendar year.
A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not perfectly correlated.
Direct Public Offering – DPO :
When a company raises capital by marketing its shares directly to its own customers, employees, suppliers, distributors and friends in the community. DPOs are an alternative to underwritten public offerings by securities broker-dealer firms where a company’s shares are sold to the broker’s customers and prospects.
- A distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield. Also referred to as “Dividend Per Share (DPS).”
2. Mandatory distributions of income and realized capital gains made to mutual fund investors.
Double Up strategy:
When executing a double-up strategy, the investor believes that the latest adverse price fluctuation is only temporary and will shortly correct itself. To capitalize on the price reversal, the investor amplifies his or her current position. Doubling up is a risky strategy, but it can yield large returns.
Statements that suggest that inflation will have a minimal impact are called “dovish”.
Doves prefer low interest rates as a means of encouraging growth within the economy because this tends to increase demand for consumer borrowing and spur consumer spending. As a result, doves believe the negative effects of low interest rates are negligible in the larger scheme of things. However, if interest rates are kept low for an indefinite period of time, inflation could rise considerably. Opposite of a ‘Hawk”
The amount of profit that a company produces during a specific period, which is usually defined as a quarter (three calendar months) or a year. Earnings typically refer to after-tax net income. Ultimately, a business’s earnings are the main determinant of its share price, because earnings and the circumstances relating to them can indicate whether the business will be profitable and successful in the long run.
Economic Growth Rate :
A measure of economic growth from one period to another in percentage terms. This measure does not adjust for inflation, it is expressed in nominal terms. In practice, it is a measure of the rate of change that a nation’s gross domestic product goes through from one year to another. Gross national product can also be used if a nation’s economy is heavily dependent on foreign earnings.
Economic recovery/ Expansion :
The phase of the business cycle when the economy moves from a trough to a peak. It is a period when business activity surges and gross domestic product expands until it reaches a peak.
Effective Duration :
A duration calculation for bonds with embedded options. Effective duration takes into account that expected cash flows will fluctuate as interest rates change.
Effective Yield :
The yield of a bond, assuming that you reinvest the coupon (interest payments) once you have received payment.
Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants deal in, any investment decisions that they make will have a large influence on the price of the underlying financial asset. Think of a swimming pool: if an elephant steps into the pool (buys into a position), the water level (stock price) increases; if the elephant gets out of the pool (sells a position), the water level (stock price) decreases. In comparison to the elephant’s influence on stock prices, the effect of an individual investor is more like that of a mouse. Examples of elephants are professionally managed entities like mutual funds, pension plans, banks and insurance companies.
Emerging Industry :
An industry, usually formed by a new product or idea, that is in the early stages of development.
Emerging Markets Bond Index – EMBI :
A benchmark index for measuring the total return performance of international government bonds issued by emerging market countries that are considered sovereign (issued in something other than local currency) and that meet specific liquidity and structural requirements. The most popular indexes are the J.P. Morgan Emerging Bond Index (EMBI) and EMBI+; the latter measures both Brady bonds and other sovereign debt while the EMBI measures only Brady bonds. In order to qualify for index membership, the debt must be more than one year to maturity, have more than $500 million outstanding, and meet stringent trading guidelines to ensure that pricing inefficiencies don’t affect the index.
- A stock or any other security representing an ownership interest.
2. On a company’s balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). Also referred to as “shareholders’ equity”.
3. In the context of margin trading, the value of securities in a margin account minus what has been borrowed from the brokerage.
4. In the context of real estate, the difference between the current market value of the property and the amount the owner still owes on the mortgage. It is the amount that the owner would receive after selling a property and paying off the mortgage.
5. In terms of investment strategies, equity (stocks) is one of the principal asset classes. The other two are fixed-income (bonds) and cash/cash-equivalents. These are used in asset allocation planning to structure a desired risk and return profile for an investor’s portfolio.
A financial instrument held by a third party on behalf of the other two parties in a transaction. The funds are held by the escrow service until it receives the appropriate written or oral instructions or until obligations have been fulfilled. Securities, funds and other assets can be held in escrow.
Escrowed To Maturity :
The condition of a bond that has been repaid in advance by means of an escrow account, which holds the funds needed to pay the periodic coupon payments and the principal.
All of the valuable things an individual owns, such as real estate, art collections, collectibles, antiques, jewellery, investments and life insurance.
Estate Planning :
The collection of preparation tasks that serve to manage an individual’s asset base in the event of their incapacitation or death, including the bequest of assets to heirs and the settlement of estate taxes. Most estate plans are set up with the help of an attorney experienced in estate law.
Some of the major estate planning tasks include:
– Creating a will
– Limiting estate taxes by setting up trust accounts in the name of beneficiaries
– Establishing a guardian for living dependents
– Naming an executor of the estate to oversee the terms of the will
– Creating/updating beneficiaries on plans such as life insurance, IRAs and 401(k)s
– Setting up funeral arrangements
– Establishing annual gifting to reduce the taxable estate
– Setting up durable power of attorney (POA) to direct other assets and investments
Estate Tax :
A tax levied on an heir’s inherited portion of an estate if the value of the estate exceeds an exclusion limit set by law. The estate tax is mostly imposed on assets left to heirs, but it does not apply to the transfer of assets to a surviving spouse. The right of spouses to leave any amount to one another is known as the “unlimited marital deduction”.
Face Value :
The nominal value or dollar value of a security stated by the issuer. For stocks, it is the original cost of the stock shown on the certificate. For bonds, it is the amount paid to the holder at maturity (generally $1,000). Also known as “par value” or simply “par”.
Federal Reserve Bank :
The banks that carry out Fed operations (in U.S.), including controlling the money supply and regulating member banks. There are 12 District Feds, headquartered in Boston, New York, Philadelphia, Cleveland, St. Louis, San Francisco, Richmond, Atlanta, Chicago, Minneapolis, Kansas City and Dallas. They are also known as “district Feds”.
Finder’s Fee :
A commission paid to an intermediary or the facilitator of a transaction. The finder’s fee is rewarded because the intermediary discovered the deal and brought it forth to interested parties. Depending on the circumstance, the finder’s fee can be paid by either the transaction’s buyer or seller. Also known as “referral income” or “referral fee”.
An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant dies. The insurance company guarantees both earnings and principal.
An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. Unlike a variable-income security, where payments change based on some underlying measure such as short-term interest rates, the payments of a fixed-income security are known in advance.
Fixed Interest Rate :
A loan or mortgage with an interest rate that will remain at a predetermined rate for the entire term of the loan. Also known as a “fixed-rate mortgage“. 7-8 out of 10 mortgages are fixed.
Floating Interest Rate :
An interest rate that is allowed to move up and down with the rest of the market or along with an index. This contrasts with a fixed interest rate, in which the interest rate of a debt obligation stays constant for the duration of the agreement. A floating interest rate can also be referred to as a variable interest rate because it can vary over the duration of the debt obligation.
Forex – FX :
The market in which currencies are traded. The forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.9 trillion per day and includes all of the currencies in the world.
Front-End Load :
A commission or sales charge applied at the time of the initial purchase for an investment, usually mutual funds and insurance products. It is deducted from the investment amount and, as a result, it lowers the size of the investment.
Full-Service Broker :
A broker that provides a large variety of services to its clients, including research and advice, retirement planning, tax tips, and much more. Of course, this all comes at a price, as commissions at full-service brokerages are much higher than those at discount brokers.
A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets. Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long or short using futures. The primary difference between options and futures is that options give the holder the right to buy or sell the underlying asset at expiration, while the holder of a futures contract is obligated to fulfill the terms of his/her contract.
Futures Market :
An auction market in which participants buy and sell commodity/future contracts for delivery on a specified future date. Trading is carried on through open yelling and hand signals in a trading pit.
Generally Accepted Accounting Principles – GAAP :
The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.
An account that can be found in the assets portion of a company’s balance sheet. Goodwill can often arise when one company is purchased by another company. In an acquisition, the amount paid for the company over book value usually accounts for the target firm’s intangible assets.
- A seller of either call or put options who profits from the premium for which the options are sold. Synonymous with option writer.
2. The creator of a trust, meaning the individual whose assets are put into the trust
Neutralizing the effect of each variable requires substantial buying and selling and, as a result of such high transactions costs, many traders only make periodic attempts to rebalance their options portfolios. With the exception of Vega (which is not a Greek letter), each measure of risk is represented by a different letter of the Greek alphabet:
Δ(Delta) represents the rate of change between the option’s price and the underlying asset’s price – in other words, price sensitivity.
Θ(Theta) represents the rate of change between an option portfolio and time, or time sensitivity.
Γ(Gamma) represents the rate of change between an option portfolio’s delta and the underlying asset’s price – in other words, second-order time price sensitivity.
ϒ(Vega) represents the rate of change between an option portfolio’s value and the underlying asset’s volatility – in other words, sensitivity to volatility.
ρ (Rho) represents the rate of change between an option portfolio’s value and the interest rate, or sensitivity to the interest rate.
Gross Domestic Product – GDP :
The monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
GDP = C + G + I + NX
“C” is equal to all private consumption, or consumer spending, in a nation’s economy
“G” is the sum of government spending
“I” is the sum of all the country’s businesses spending on capital
“NX” is the nation’s total net exports, calculated as total exports minus total imports. (NX = Exports – Imports)
Gross Income :
- An individual’s total personal income before taking taxes or deductions into account.
2. A company’s revenue minus cost of goods sold. Also called “gross margin” and “gross profit”.
Gross National Product – GNP :
An economic statistic that includes GDP, plus any income earned by residents from overseas investments, minus income earned within the domestic economy by overseas residents.
Growth Industry :
A sector of the economy experiencing a higher-than-average growth rate.
Growth Fund :
A diversified portfolio of stocks that has capital appreciation as its primary goal, with little or no dividend payouts. Portfolio companies would mainly consist of companies with above-average growth in earnings that reinvest their earnings into expansion, acquisitions, and/or research and development.
Guaranteed Death Benefit :
A benefit term that guarantees that the beneficiary, as named in the contract, will receive a death benefit if the annuitant dies before the annuity begins paying benefits. The benefit received differs among companies and contracts, but the beneficiary is guaranteed an amount equal to what was invested or the value of the contract on the most recent policy anniversary statement, whichever is higher.
Guaranteed Lifetime Withdrawal Benefit – GLWB :
A rider on a variable annuity that allows minimum withdrawals from the invested amount without having to annuitize the investment. The amount that can be withdrawn is based on a percentage of the total amount invested in the annuity.
Guaranteed Minimum Withdrawal Benefit – GMWB :
A type of option that annuitants can purchase for their retirement annuities. This specific option gives annuitants the ability to protect their retirement investments against downside market risk by allowing the annuitant the right to withdraw a maximum percentage of their entire investment each year until the initial investment amount has been recouped.
Guaranteed Investment (Interest) Certificate – GIC :
A deposit investment security sold by Canadian banks and trust companies. They are often bought for retirement plans because they provide a low-risk fixed rate of return. The principal is at risk only if the bank defaults.
Hard Landing :
A term used to describe an economy going into recession as the government attempts to slow down inflation.
Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.
Hedge Fund :
An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.
HELOC/ Home Equity Line Of Credit :
A line of credit extended to a homeowner that uses the borrower’s home as collateral. Once a maximum loan balance is established, the homeowner may draw on the line of credit at his or her discretion. Interest is charged on a predetermined variable rate, which is usually based on prevailing prime rates. Once there is a balance owing on the loan, the homeowner can choose the repayment schedule as long as minimum interest payments are made monthly. The term of a HELOC can last anywhere from less than five to more than 20 years, at the end of which all balances must be paid in full.
HECM /Home Equity Conversion Mortgage(U.S.) :
A type of Federal Housing Administration (FHA) insured reverse mortgage. Home Equity Conversion Mortgages allow seniors to convert the equity in their home to cash. The amount that may be borrowed is based on the appraised value of the home (subject to FHA limits), and the age of the borrower (borrowers must be at least 62 years old). Money is advanced against the value of the home. Interest accrues on the outstanding loan balance, but no payments must be made until the home is sold or the borrower(s) die, at which point the mortgage must be repaid entirely. Because the home secures the mortgage, no credit check is made on the borrower. Reverse Mortgage in Canada.
High-Yield Bond :
A high paying bond with a lower credit rating than investment-grade corporate bonds, Treasury bonds and municipal bonds. Because of the higher risk of default, these bonds pay a higher yield than investment grade bonds. Based on the two main credit rating agencies, high-yield bonds carry a rating of ‘BBB’ or lower from S&P, and ‘Baa’ or lower from Moody’s. Bonds with ratings above these levels are considered investment grade. Credit ratings can be as low as ‘D’ (currently in default), and most bonds with ‘C’ ratings or lower carry a high risk of default; to compensate for this risk, yields will typically be very high. Also known as “junk bonds”.
Hostile Takeover :
A takeover attempt that is strongly resisted by the target firm.
Housing Starts :
The number of residential building construction projects that have begun during any particular month.
Income Splitting :
A tax reduction strategy employed by families living in areas that are subject to bracketed tax regulations. The goal of using an income-splitting strategy is to reduce the family’s gross tax level, at the expense of some family members paying higher taxes than they otherwise would.
Income Statement :
A financial statement that measures a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year. Also known as the “profit and loss statement” or “statement of revenue and expense”.
Income Tax :
A tax that governments impose on financial income generated by all entities within their jurisdiction. By law, businesses and individuals must file an income tax return every year to determine whether they owe any taxes or are eligible for a tax refund. Income tax is a key source of funds that the government uses to fund its activities and serve the public.
Income Trust :
A qualified income trust as designated by the Canada Revenue Agency that operates as a profit-seeking corporation. This type of income trust, which pays out all earnings to unit holders before paying taxes, is usually traded publicly on a securities exchange. Canadian income trusts enjoy special corporate tax privileges. Taxed at 30% as of 2006.
A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it. Each index has its own calculation methodology and is usually expressed in terms of a change from a base value. Thus, the percentage change is more important than the actual numeric value. Stock and bond market indexes are used to construct index mutual funds and exchange-traded funds (ETFs) whose portfolios mirror the components of the index.
A contractual agreement made between different parties to compensate for any damages or losses.
Index Fund :
A type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.
In the context of technical analysis, an indicator is a mathematical calculation based on a securities price and/or volume. The result is used to predict future prices. Common technical analysis indicators are the moving average convergence-divergence (MACD) indicator and the relative strength index (RSI). In an economic context, an indicator could be a measure such as the unemployment rate, which can be used to predict future economic trends. Common general economic indicators are the unemployment rate, new housing starts and the consumer price index (CPI).
The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
Initial Public Offering – IPO :
The first sale of stock by a private company to the public. IPO’s are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market. Also referred to as a “public offering”.
Interest Rate :
The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR). The assets borrowed could include, cash, consumer goods, large assets, such as a vehicle or building. Interest is essentially a rental, or leasing charge to the borrower, for the asset’s use. In the case of a large asset, like a vehicle or building, the interest rate is sometimes known as the “lease rate”.
The act of dying without a legal will. Determining the distribution of the deceased’s assets then becomes the responsibility of a probate court.
Investment Grade :
A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor’s, use different designations consisting of upper- and lower-case letters ‘A’ and ‘B’ to identify a bond’s credit quality rating. ‘AAA’ and ‘AA’ (high credit quality) and ‘A’ and ‘BBB’ (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations (‘BB’, ‘B’, ‘CCC’, etc.) are considered low credit quality, and are commonly referred to as “junk bonds”.
Irrevocable Trust :
A trust that can’t be modified or terminated without the permission of the beneficiary. The grantor, having transferred assets into the trust, effectively removes all of his or her rights of ownership to the assets and the trust. This is the opposite of a “revocable trust“, which allows the grantor to modify the trust.
Junk Bond :
A bond rated ‘BB’ or lower because of its high default risk. Also known as a “high-yield bond” or “speculative bond”.
- Lagging indicators confirm long-term trends, but they do not predict them. Some examples are unemployment, corporate profits and labour cost per unit of output. Interest rates are another good lagging indicator; rates change after severe market changes.
2. An example of a lagging indicator is a moving average crossover, because it occurs after a certain price move has already happened. Technical traders use a short-term average crossing above a long-term average as confirmation when placing buy orders since it suggests an increase in momentum. The drawback of using this method is that a significant move may have already occurred, resulting in the trader entering a position too late.
Large Cap – Big Cap :
A term used by the investment community to refer to companies with a market capitalization value of more than $10 billion. Large cap is an abbreviation of the term “large market capitalization”. Market capitalization is calculated by multiplying the number of a company’s shares outstanding by its stock price per share.
Leading Indicator :
A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in the economy, but are not always accurate. Bond yields are typically a good leading indicator of the market because traders anticipate and speculate trends in the economy.
According to Irish folklore, the location of hidden treasure is revealed only when the leprechaun is caught. In the case of a leprechaun leader, the “buried treasure” is not usually buried, but rather in a protected offshore account! Examples of leprechaun leaders are the executives of Enron, who stowed away millions of dollars until they were finally caught. Also spelled “Lepre-con Leader”.
- The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.
2. The amount of debt used to finance a firm’s assets. A firm with significantly more debt than equity is considered to be highly leveraged.
The act of following the crowd into an investment that will inevitably head for disaster.
Liar Loan :
A category of mortgages known as low-documentation or no-documentation mortgages that have been abused to the point where the loans are sometimes referred to as liar loans. On certain low-documentation loan programs, such as stated income/stated asset (SISA) loans, income and assets are simply stated on the loan application. On other loan programs, such as no income/no asset (NINA) loans, no income and assets are given on the loan application form. These loan programs open the door for unethical behaviour by unscrupulous borrowers and lenders. Often used by people with unique income streams i.e. Tips.
When a creditor or bank has the right to sell the mortgaged or collateral property of those who fail to meet the obligations of a loan contract.
Due to the tax-preferred nature of annuities, very wealthy investors or above-average income earners often use these life insurance products to transfer large sums of money or to mitigate the effects of taxes on their annual income.
Lipstick Indicator :
An indicator based on the theory that a consumer turns to less expensive indulgences, such as lipstick, when she (or he) feels less than confident about the future. Therefore, lipstick sales tend to increase during times of economic uncertainty or a recession. This term was coined by Leonard Lauder (chairman of Estee Lauder), who consistently found that during tough economic times, his lipstick sales went up. Believe it or not, the indicator has been quite a reliable signal of consumer attitudes over the years. For example, in the months following the September 11 terrorist attacks, lipstick sales doubled.
Line Of Credit – LOC :
An arrangement between a financial institution, usually a bank, and a customer that establishes a maximum loan balance that the bank will permit the borrower to maintain. The borrower can draw down on the line of credit at any time, as long as he or she does not exceed the maximum set in the agreement.
- The degree to which an asset or security can be bought or sold in the market without affecting the asset’s price. Liquidity is characterized by a high level of trading activity.
2. The ability to convert an asset to cash quickly. Also known as “marketability”.
Long-Term Equity Anticipation Securities – LEAPS :
Publicly traded options contracts with expiration dates that are longer than one year. Structurally, LEAPS are no different than short-term options, but the later expiration dates offer the opportunity for long-term investors to gain exposure to prolonged price changes without needing to use a combination of shorter-term option contracts. The premiums for LEAPs are higher than for standard options in the same stock because the increased expiration date gives the underlying asset more time to make a substantial move and for the investor to make a healthy profit.
Luxury Tax :
A tax placed on products or services that are deemed to be unnecessary or non-essential. This type of tax is an indirect tax in that the tax increases the price of the good or service and is only incurred by those who purchase or use the product. The term has remained even though many of the products that are assessed with luxury taxes today are no longer seen as “luxuries” in the literal sense. Today’s definition leans more toward “sinful” items, such as tobacco, alcohol, jewellery and high-end automobiles. They are implemented as much in an attempt to change consumption patterns as to collect tax revenues. Luxury taxes can also be called “excise taxes” or “sin taxes”.
- Borrowed money that is used to purchase securities. This practice is referred to as “buying on margin”.
2. The amount of equity contributed by a customer as a percentage of the current market value of the securities held in a margin account.
3. In a general business context, the difference between a product’s (or service’s) selling price and the cost of production.
4. The portion of the interest rate on an adjustable-rate mortgage that is over and above the adjustment-index rate. This portion is retained as profit by the lender.
Margin Call :
A broker’s demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. This is sometimes called a “fed call” or “maintenance call”.
- A medium that allows buyers and sellers of a specific good or service to interact in order to facilitate an exchange. The price that individuals pay during the transaction may be determined by a number of factors, but price is often determined by the forces of supply and demand.
2. The general market where securities are traded.
3. People with the desire and ability to buy a specific product/service.
Market Exposure :
The amount of funds invested in a particular type of security and/or market sector or industry and usually expressed as a percentage of total portfolio holdings. Thus, it is the amount an investor has at risk or the amount he/she can lose. Also known as “exposure”.
Market Penetration :
A measure of the amount of sales or adoption of a product or service compared to the total theoretical market for that product or service. The amount of sales or adoption can be an individual company’s sale or industry while the theoretical market can be the total population or an estimate of total potential consumers for the product
Market Saturation :
When the amount of product provided in a market has been maximized in the current state of the marketplace. At the point of saturation, further growth can only be achieved through product improvements, market share gains or a rise in overall consumer demand
Market Share :
The percentage of an industry or market’s total sales that is earned by a particular company over a specified time period. Market share is calculated by taking the company’s sales over the period and dividing it by the total sales of the industry over the same period. This metric is used to give a general idea of the size of a company to its market and its competitors.
Market Value :
- The current quoted price at which investors buy or sell a share of common stock or a bond at a given time. Also known as “market price“.
2. The market capitalization plus the market value of debt. Sometimes referred to as “total market value”.
- The length of time until the principal amount of a bond must be repaid.
2. The end of the life of a security.
Mature Industry :
An industry which has passed both the emerging and the growth phases of industry growth. Earnings and sales grow slower in mature industries than in growth and emerging industries.
Maturity Date :
The date on which the principal amount of a note, draft, acceptance bond or other debt instrument becomes due and is repaid to the investor and interest payments stop. It is also the termination or due date on which an instalment loan must be paid in full.
The simple mathematical average of a set of two or more numbers. The mean for a given set of numbers can be computed in more than one way, including the arithmetic mean method, which uses the sum of the numbers in the series, and the geometric mean method. However, all of the primary methods for computing a simple average of a normal number series produce the same approximate result most of the time.
MER/Expense Ratio :
A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual calculation, where a fund’s operating expenses are divided by the average dollar value of its assets under management. Operating expenses are taken out of a fund’s assets and lower the return to a fund’s investors.
Also known as “management expense ratio” (MER) , expense ratio.
Mill Rate :
The amount of tax paid per dollar of the assessed property value. This is called the mill rate because the number is expressed in mills – one mill is 1/10th of a cent ($.001).
Money Laundering :
The process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source.
Money Market :
A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos).
Morning Star :
A bullish candlestick pattern that consists of three candles that have demonstrated the following characteristics:
1. The first bar is a large red candlestick located within a defined downtrend.
2. The second bar is a small-bodied candle (either red or white) that closes below the first red bar.
3. The last bar is a large white candle that opens above the middle candle and closes near the center of the first bar’s body, this pattern is used by traders as an early indication that the downtrend is about to reverse.
4. A rating system for funds.
A debt instrument that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large purchases of real estate without paying the entire value of the purchase up front. Mortgages are also known as “liens against property” or “claims on property”.
Mutual Fund :
An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money mangers, who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
A computerized system that facilitates trading and provides price quotations on more than 5,000 of the more actively traded over the counter stocks. Created in 1971, the NASDAQ was the world’s first electronic stock market. Stocks on the NASDAQ are traditionally listed under four or five letter ticker symbols. If the company is a transfer from the New York Stock Exchange, the symbol may be comprised of three letters.
Net Asset Value – NAV :
A mutual fund’s price per share or exchange-traded fund’s (ETF) per-share value. In both cases, the per-share dollar amount of the fund is derived by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding. In terms of corporate valuations, the value of assets less liabilities equals net asset value (NAV), or “book value”. NAV per share is computed once a day based on the closing market prices of the securities in the fund’s portfolio. All mutual fund’s buy and sell orders are processed at the NAV of the trade date. However, investors must wait until the following day to get the trade price. Mutual funds pay out virtually all of their income and capital gains. As a result, changes in NAV are not the best gauge of mutual fund performance, which is best measured by annual total return. Because ETFs and closed-end funds trade like stocks, their shares trade at market value, which can be a dollar value above (trading at a premium) or below (trading at a discount.)
Net Asset Value Per Share – NAVPS :
An expression for net asset value that represents a fund’s (mutual, exchange-traded, and closed-end) or a company’s value per share. It is calculated by dividing the total net asset value of the fund or company by the number of shares outstanding. Also referred to as “book value per share”. Calculated as:
MUTUAL FUND`S NET ASSET VALUE
NET ASSET VALUE= # OF SHARES OUTSTANDING
Net file :
Open February to September, this service is one of the electronic filing options available to Canadians, to transmit their tax returns to the Canada Revenue Agency (CRA). Using software approved by the CRA, filers prepare their tax returns, and then upload them on the CRA’s website using a code provided to them in their annual tax package.
Net Income – NI :
- A company’s total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. This number is found on a company’s income statement and is an important measure of how profitable the company is over a period of time. The measure is also used to calculate earnings per share. Often referred to as “the bottom line” since net income is listed at the bottom of the income statement. In the U.K., net income is known as “profit attributable to shareholders”.
2. An individual’s income after deductions, credits and taxes are factored into gross income. Deductions and credits are subtracted from gross income to arrive at taxable income, which is used to calculate income tax. Net income is income tax subtracted from taxable income.
Short for Japan’s Nikkei 225 Stock Average, the leading and most-respected index of Japanese stocks. It is a price-weighted index comprised of Japan’s top 225 blue-chip companies on the Tokyo Stock Exchange. The Nikkei is equivalent to the Dow Jones Industrial Average Index in the U.S. In fact, it was called the Nikkei Dow Jones Stock Average from 1975 to 1985.
NINJA Loan :
A slang term for a loan extended to a borrower with “no income, no job and no assets”. Whereas most lenders require the borrower to show a stable stream of income or sufficient collateral, a NINJA loan ignores the verification process.
No-Load Fund :
A fund in which shares are sold without a commission or sales charge. The reason for this is that the shares are distributed directly by the investment company, instead of going through a secondary party. This is the opposite of a load fund, which charges a commission at the time of the fund’s purchase, at the time of its sale, or as a “level-load” for as long as the investor holds the fund.
A debt security, usually maturing in one to 10 years.
Notice Of Assessment – NOA :
An annual statement sent by revenue authorities to taxpayers detailing the amount of income tax they owe. It includes the amount of their tax refund, tax credit and income tax already paid.
OAS/Old age security:
A pension paid to Canadians after an attained age.
Located or based outside of one’s national boundaries.
A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).
A slang term given to investors or other market participants who ignore important pieces of information or situations, which have the ability to impact them or the market in which they operate. The reasons behind type of action can include risk aversion and bias.
Over contribution :
Any contribution to a tax-deductible retirement savings plan exceeding the maximum allowed contribution for a given period as determined by the retirement plan’s registrar. Over contributions are subject to the retirement plan’s regulations or laws. Over contributions are usually subject to some form of monetary penalty, intentioned to reduce their occurrences.
- A situation where a portfolio holds an excess amount of a particular security when compared to the security’s weight in the underlying benchmark portfolio. Actively managed portfolios will make a security overweight when doing so will allow the portfolio to achieve excess returns.
2. An analyst’s opinion regarding the future performance of a security. Overweight will usually signify that the security is expected to outperform either its industry, sector or, even, the market altogether.
Passive Management :
A style of management associated with mutual and exchange-traded funds (ETF) where a fund’s portfolio mirrors a market index. Passive management is the opposite of active management in which a fund’s manager(s) attempt to beat the market with various investing strategies and buying/selling decisions of a portfolio’s securities. Also known as “passive strategy,” “passive investing” or “index investing.”
The highest point between the end of an economic expansion and the start of a contraction in a business cycle. The peak of the cycle refers to the last month before several key economic indicators, such as employment and new housing starts, begin to fall. It is at this point that real GDP spending in an economy is its highest level.
Penny Stock :
A stock that trades at a relatively low price and market capitalization, usually outside of the major market exchanges. These types of stocks are generally considered to be highly speculative and high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure. They will often trade over the counter through the OTCBB and pink sheets.
Pension Adjustment – PA :
The amount of contributions that can be made to a Registered Retirement Savings Plan (RRSP) on top of any contributions to a Registered Pension Plan (RPP) in a given year.
Pension Plan :
A type of retirement plan, usually tax exempt, wherein an employer makes contributions toward a pool of funds set aside for an employee’s future benefit. The pool of funds is then invested on the employee’s behalf, allowing the employee to receive benefits upon retirement.
Permanent Insurance :
An umbrella term for life insurance plans that do not expire (unlike term life insurance) and combine a death benefit with a savings portion. This savings portion can build a cash value – against which the policy owner can borrow funds, or in some instances, the owner can withdraw the cash value to help meet future goals, such as paying for a child’s college education. The two main types of permanent life insurance are whole and universal life Pig :
An investor who is often seen as greedy, having forgotten his or her original investment strategy to focus on securing unrealistic future gains. After experiencing a gain, these investors often have very high expectations about the future prospects of the investment and, therefore, do not sell their position to realize the gain.
The Ponzi scam is named after Charles Ponzi, a clerk in Boston who first orchestrated such a scheme in 1919. A Ponzi scheme is similar to a pyramid scheme in that both are based on using new investors’ funds to pay the earlier backers. One difference between the two schemes is that the Ponzi mastermind gathers all relevant funds from new investors and then distributes them. Pyramid schemes, on the other hand, allow each investor to directly benefit depending on how many new investors are recruited. In this case, the person on the top of the pyramid does not at any point have access to all the money in the system. For both schemes, however, eventually there isn’t enough money to go around and the schemes unravel.
A slang term often used to describe people with insider information.
A grouping of financial assets such as stocks, bonds and cash equivalents, as well as their mutual, exchange-traded and closed-fund counterparts. Portfolios are held directly by investors and/or managed by financial professionals.
Portfolio Manager :
The person or persons responsible for investing a mutual, exchange-traded or closed-end fund’s assets, implementing its investment strategy and managing the day-to-day portfolio trading.
Preferred Stock :
A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.
The precise details as to the structure of preferred stock is specific to each corporation. However, the best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential appreciation). Also known as “preferred shares”.
Price-Earnings Ratio – P/E Ratio :
A valuation ratio of a company’s current share price compared to its per-share earnings.
For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).
EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters. Also sometimes known as “price multiple” or “earnings multiple”.
SHARE PRICE=MARKET VALUE PER SHARE
EARNING PER SHARE (EPS)
A classification of borrowers, rates or holdings in the lending market that are considered to be of high quality. This classification is placed on those borrowers that are deemed to be the most credit-worthy and the prime rate is the rate that a lender will lend to its high quality borrowers.
- The amount borrowed or the amount still owed on a loan, separate from interest.
2. The original amount invested, separate from earnings.
3. The face value of a bond.
4. The owner of a private company.
5. The main party to a transaction, acting as either a buyer or seller for his/her own account and risk.
Pro Forma :
A Latin term meaning “for the sake of form”. In the investing world, it describes a method of calculating financial results in order to emphasize either current or projected figures.
The legal process in which a will is reviewed to determine whether it is valid and authentic. Probate also refers to the general administering of a deceased person’s will or the estate of a deceased person without a will. The court appoints either an executor named in the will (or an administrator if there is no will) to administer the process of collecting the assets of the deceased person, paying any liabilities remaining on the person’s estate and finally distributing the assets of the estate to beneficiaries named in the will or determined as such by the executor.
Profit Margin :
A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings. Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales.
Promissory Note :
A written, dated and signed two-party instrument containing an unconditional promise by the maker to pay a definite sum of money to a payee on demand or at a specified future date.
A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details about an investment offering for sale to the public. A prospectus should contain the facts that an investor needs to make an informed investment decision. Also known as an “offer document”.
An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time. The buyer of a put option estimates that the underlying asset will drop below the exercise price before the expiration date.
A pyramid scheme is initiated by an individual or a company that starts recruiting investors with an offer of guaranteed high returns. As the scheme begins, the earliest investors do receive a high rate of return, but these gains are paid for by new recruits and are not a return on any real investment.
From the day the scam is initiated, a pyramid scheme’s liabilities exceed its assets. The only way it can generate wealth is by promising extraordinary returns to new recruits; the only way these returns can be paid is by getting additional investors. Invariably these schemes lose steam and the pyramid collapses.
Real Economic Growth Rate :
A measure of economic growth from one period to another expressed as a percentage and adjusted for inflation (i.e. expressed in real as opposed to nominal terms). The real economic growth rate is a measure of the rate of change that a nation’s gross domestic product (GDP) experiences from one year to another. Gross national product (GNP) can also be used if a nation’s economy is heavily dependent on foreign earnings.
Real Estate Investment Trust – REIT :
A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.
Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties’ rents.
Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.
Hybrid REITs: Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.
Individuals can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate. An additional benefit to investing in REITs is the fact that many are accompanied by dividend reinvestment plans (DRIPs). Among other things, REITs invest in shopping malls, office buildings, apartments, warehouses and hotels. Some REITs will invest specifically in one area of real estate – shopping malls, for example – or in one specific region, state or country. Investing in REITs is a liquid, dividend-paying means of participating in the real estate market.
Real Estate Operating Company – REOC :
A company that invests in real estate and whose shares trade on a public exchange. A real estate operating company (REOC) is similar to a real estate investment trust (REIT), except that an REOC will reinvest its earnings into the business, rather than distributing them to unit holders like REITs do. Also, REOCs are more flexible than REITs in terms of what types of real estate investments they can makes.
Realized Loss :
A loss recognized when assets are sold for a price lower than the original purchase price.
A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP); although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession.
The act of awarding a target person, group or entity some form of monetary benefit as a result of the target performing some action or as a result of some action happening to the target. This is one of the main tenets of capitalism, as people perform a task as a result of being paid some sort of relevant incentive.
Red Herring :
A preliminary registration statement that must be filed with the SEC describing a new issue of stock and the prospects of the issuing company.
An economic policy whereby a government uses fiscal or monetary stimulus in order to expand a country’s output.
Registered Pension Plan – RPP :
A form of a trust that provides pension benefits for an employee of a company upon retirement. RPPs are registered with the Canada Revenue Agency. The employee and employer, or just the employer make contributions to this retirement plan until the employee leaves the company or retires.
Registered Retirement Income Fund – RRIF :
A retirement fund similar to an annuity contract that pays out income to a beneficiary or a number of beneficiaries. To fund their retirement, RRSP holders often roll over their RRSPs into an RRIF. RRIF payouts are considered a part of the beneficiary’s normal income and are taxed as such by the Canadian Revenue Agency in the year that the beneficiary receives payouts. The organization or company that holds the RRIF is known as the carrier of the plan. Carriers can be insurance companies, banks or any kind of licensed financial intermediary. The Government of Canada is not the carrier for RRIFs; it merely registers them for tax purposes.
Registered Retirement Savings Plan – RRSP :
A legal trust registered with the Canada Revenue Agency and used to save for retirement. RRSP contributions are tax deductible and taxes are deferred until the money is withdrawn. An RRSP can contain stocks, bonds, mutual funds, GICs, contracts and even mortgage-backed equity. RRSPs have two main tax advantages:
1. Contributors deduct contributions against their income. For example, if a contributor’s tax rate is 40%, every $100 he or she invests in an RRSP will save that person $40 in taxes, up to his or her contribution limit.
2. The growth of RRSP investments is tax sheltered. Unlike with non-RRSP investments, returns are exempt from any capital-gains tax, dividend tax or income tax. This means that investments under RRSPs compound at a pre-tax rate.
Registered Retirement Savings Plan Contribution – RRSP Contribution :
Assets invested in an RRSP. RRSP contributions can be made at any time and for any amount up to an individual’s contribution limit for the year. If a contributor does not make the maximum allowable contribution, the balance of unused contribution room from 1991 onwards is carried forward indefinitely. This allows people to make up for the years that they did not maximize their allowed RRSP contributions.
Retained Earnings :
The percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business or to pay debt. It is recorded under shareholders’ equity on the balance sheet. Calculated by adding net income to (or subtracting any net losses from) beginning retained earnings and subtracting any dividends paid to shareholders.
Also known as the “retention ratio” or “retained surplus”. In most cases, companies retain their earnings in order to invest them into areas where the company can create growth opportunities, such as buying new machinery or spending the money on more research and development. Should a net loss be greater than beginning retained earnings, retained earnings can become negative, creating a deficit.
The gain or loss of a security in a particular period. The return consists of the income and the capital gains relative on an investment. It is usually quoted as a percentage.
Return On Investment – ROI :
A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a Percentage or a ratio. GAIN- C0ST
COST OF INVESTMENT
Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.
The amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the “top line” or “gross income” figure from which costs are subtracted to determine net income. Revenue is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold. Revenue is also known as “REVs”.
An additional property purchased with the intent of earning additional income from by either renting, re-selling or growing its equity. Almost all revenue properties with cause a capital gain/loss at time of disposing.
Revocable Trust :
A trust whereby provisions can be altered or cancelled dependent on the grantor. During the life of the trust, income earned is distributed to the grantor, and only after death does property transfer to the beneficiaries. Also referred to as a “revocable living trust”.
A provision in an insurance policy allowing for amendments to its terms and/or coverage.
The chance that an investment’s actual return will be different than expected. This includes the possibility of losing some or all of the original investment. Risk is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment.
A rollover is when you do the following:
A)Reinvesting funds from a mature security into a new issue of the same or a similar security.
B)Transferring the holdings of one retirement plan to another without suffering tax consequences.
C)A charge that is incurred by Forex investors who move their positions to the following delivery date.
Rule Of 18 :
A rule whereby the sum of the inflation rate and the P/E ratio of the Dow Jones Industrial Average is an indicator of the direction of the stock market. If the total is above 18, stocks are supposed to decrease. If the total is under 18, then the stock market is expected to increase. For example, if the P/E ratio for the Dow were 14 and the annual inflation rate were 3%, their sum would equal 17. This number would indicate that the stock market will increase.
Rule Of 72 :
A rule stating that in order to find the number of years required to double your money at a given interest rate, you divide the compound return into 72. The result is the approximate number of years that it will take for your investment to double. (Compounding interest.)
Russell Top 50 Index :
A market capitalization weighted index of the 50 largest stocks in the Russell 3000 universe of U.S.-based equities. The index can be considered a representation of mega cap stocks, as the average member’s market cap is more than $175 billion.
The index is reconstituted annually to account for new and growing member companies.
A large number of investments carry sales charges. The amount of a sales charge represents the difference between the purchase price per share paid by the investor and the net asset value per share of the mutual fund. By regulation, the maximum permitted sales charge is 8%, but most loads fall within a 3-6% range. With funds that carry a sales charge, there are three classes of shares: A, B, and C. The letter designations indicate the timing of when the charge is paid. For Class A shares, the sales charge is paid at the time of purchase (front-end load). For Class B shares, it is due when the shares are sold (back-end load). Class C shareholders incur a sales charge on a regular basis for as long as they hold the fund.
Segregated Fund /Seg Fund:
A type of pool investment that is similar to a mutual fund, but is considered an insurance product. Proceeds received by the insurance company are used to purchase underlying assets, and then shares of the segregated funds are sold to investors.
Self-Directed RRSP :
A type of RRSP (Registered Retirement Savings Plan) whose owner determines the asset mix held in the trust. An RRSP is a Canadian retirement savings vehicle to which contributions are tax deductible on an annual basis, up to a certain amount. With a self-directed RRSP, an investor can determine the portfolio of investment products in his or her RRSP. Investments that are not RRSP eligible, however, are sill not allowed in a self-directed RRSP.
- An individual or entity that exchanges any type of good or service in return for payment.
2. In the option market, the seller is the investor who collects a premium from the buyer in return for taking on the risk associated with holding a short position in an option. The seller of an option is also known as a “writer”.
Series A Financing :
The first round of financing undergone for a new business venture after seed capital. Generally, this is the first time that company ownership is offered to external investors. Series A financing, may be provided in the form of preferred stock, and may offer anti-dilution provisions in the event that further financing through preferred or common stock occurs in the future. Also known as “A round” or “A round financing”.
An investor who lacks a focused trading strategy and trades on emotion and the suggestions of others, including friends, family and financial gurus. This type of investor often makes rash investments without first determining whether these decisions are financially viable. The behaviour of sheep contrasts with that of bulls and bears, who have focused views about the market.
Shell Corporation :
A corporation without active business operations or significant assets.
Short Selling :
The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.
Simple Interest :
A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate by the principal by the number of periods.
P is the loan amount Simple interest= PxIxN
I is the interest rate
N is the duration of the loan, using number of periods.
SISA -Stated Income / Stated Asset Mortgage:
A type of reduced documentation mortgage program which allows the borrower to state on the loan application what their income and assets are without verification by the lender; however, the source of the income is still verified.
Slush Fund :
A fund (or something similar) that does not have a designated purpose. These types of funds are often illegal. Think of politicians handing out free money to their friends for no real purpose of the people.
Small Cap :
Refers to stocks with a relatively small market capitalization. The definition of small cap can vary among brokerages, but generally it is a company with a market capitalization of between $300 million and $2 billion.
Slang for somebody who frequently launders money.
A method of efficient debt repayment in which the debt holder initially devotes only enough funds to cover the minimum payments on each debt, after which any remaining available funds from the debt repayment budget are spent on an additional payment to the debt bearing the highest interest rate. Once the debt with the highest interest rate is completely paid for, subsequent extra debt payments go toward the next highest interest-bearing debt. This process continues until all the debts are paid off. Also called a waterfall payment.
Soft Landing :
A term used to describe a rate of economic growth high enough to avoid recession, but slow enough to avoid high inflation.
The process of selecting investments with higher risk in order to profit from an anticipated price movement.
- The difference between the bid and the ask price of a security or asset.
2. An options position established by purchasing one option and selling another option of the same class but of a different series.
A condition of slow economic growth and relatively high unemployment – a time of stagnation – accompanied by a rise in prices, or inflation.
A period of little or no growth in the economy. Economic growth of less than 2-3% is considered stagnation. Sometimes used to describe low trading volume or inactive trading in securities.
Standard & Poor’s 500 Index – S&P 500 :
An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.
Companies included in the index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor’s. The S&P 500 is a market value weighted index – each stock’s weight in the index is proportionate to its market value.
Standard Deviation :
- A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of variance.
2. In finance, standard deviation is applied to the annual rate of return of an investment to measure the investment’s volatility. Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility.
A type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings. There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders’ meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated. Also known as “shares” or “equity”.
Stock Option :
A privilege, sold by one party to another, that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or on a specific date. In the U.K., it is known as a “share option”.
Slang for an individual homeowner who strips the equity out of his or her home through mortgage refinancing. The proceeds are generally not re-invested, but spent on consumer goods.
Sub prime :
A classification of borrowers with a tarnished or limited credit history. Lenders will use a credit scoring system to determine which loans a borrower may qualify for. Sub prime loans carry more credit risk, and as such, will carry higher interest rates as well. Approximately 25% of mortgage originations are classified as sub prime. Badly used in U.S. by over burdening people (w/very high interest)that had little chance of paying the loan back once the markets turned.
- The volatility that exists in the financial markets can be seen easily when the price of a certain security undergoes rapid changes in value. These sharp shifts are often referred to as a swing. For example, it is not uncommon to see a major index swing from negative territory to positive territory just prior to the market close.
2. Swing trading is often used by individual investors since their small positions won’t have a dramatic impact on the price of the security. On the other hand, financial institutions do not have the luxury of entering or exiting a position over a matter of days since the size of their orders can greatly influence the price of the asset.
Tax Avoidance :
The use of legal methods to modify an individual’s financial situation in order to lower the amount of income tax owed. This is generally accomplished by claiming the permissible deductions and credits. This practice differs from tax evasion, which is illegal.
Tax Evasion :
An illegal practice where a person, organization or corporation intentionally avoids paying his/her/its true tax liability. Those caught evading taxes are generally subject to criminal charges and substantial penalties.
Tax Shelter :
A legal method of minimizing or decreasing an investor’s taxable income and, therefore, his or her tax liability. Tax shelters can range from investments or investment accounts that provide favourable tax treatment, to activities or transactions that lower taxable income. The most common type of tax shelter is an employer-sponsored 401(k) plan in U.S and a U.L. in Canada.
Taxable Event :
Any event or transaction that results in a tax consequence for the party who executes the event. Common examples of taxable events for investors include receiving interest and dividends, selling securities for a gain and exercising options.
Taxable Income :
The amount of income that is used to calculate an individual’s or a company’s income tax due. Taxable income is generally described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments that are allowable in that tax year.
Taxable income is also generated from appreciated assets that have been sold or capitalized during the year and from dividends and interest income. Income from these sources is generally taxed at a different rate and calculated separately by the tax entity.
Tenancy In Common :
A way for two or more people to have equal ownership interests in a property. Each owner has the right to leave his or her share of the property to any beneficiary upon the owner’s death. Each party (owner) in a tenancy-in-common agreement has the right to use the property even if the physical size of the stake is different.
The amount of time left for the repayment of a loan or contract or the initial term length of a loan. Tenor can be expressed in years, months or days.
Term Insurance :
A policy with a set duration limit on the coverage period. Once the policy is expired, it is up to the policy owner to decide whether to renew the term life insurance policy or to let the coverage end. This type of insurance policy contrasts with permanent life insurance, in which duration extends until the policy owner reaches 100 years of age (i.e. death).
Treasury Bill – T-Bill :
A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks). T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the return to the holder.
As a general strategy, it is best to trade with trends, meaning that if the general trend of the market is headed up, you should be very cautious about taking any positions that rely on the trend going in the opposite direction. A trend can also apply to interest rates, yields, equities and any other market which is characterized by a long-term movement in price or volume.
Trickle Down Theory :
An economic theory which states that investing money in companies and giving them tax breaks is the best way to stimulate the economy.
The stage of the economy’s business cycle that marks the end of a period of declining business activity and the transition to expansion.
An individual who holds or manages assets for the benefit of another.
- In derivatives, the security that must be delivered when a derivative contract, such as a put or call option, is exercised.
2. In equities, the common stock that must be delivered when a warrant is exercised, or when a convertible bond or convertible preferred share is converted to common stock.
A stock or other security that is trading below its true value.
Unemployment Rate :
The percentage of the total labour force that is unemployed but actively seeking employment and willing to work. (3-6%)
Universal Life (U.L.):
A type of flexible permanent life insurance offering the low-cost protection of term life insurance as well as a savings element (like whole life insurance) which is invested to provide a cash value build-up. The death benefit, savings element and premiums can be reviewed and altered as a policyholder’s circumstances change. In addition, unlike whole life insurance, universal life insurance allows the policyholder to use the interest from his or her accumulated savings to help pay premiums.
Value Investing :
The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company’s long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.
Typically, value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields.
Value Stock :
A stock that tends to trade at a lower price relative to it’s fundamentals (i.e. dividends, earnings, sales, etc.) and thus considered undervalued by a value investor. Common characteristics of such stocks include a high dividend yield, low price-to-book ratio and/or low price-to-earnings ratio.
Variable Interest Rate :
An interest rate that moves up and down based on the changes of an underlying interest rate index. Credit Cards are typically Variable rated.
Variance measures the variability (volatility) from an average. Volatility is a measure of risk, so this statistic can help determine the risk an investor might take on when purchasing a specific security.
Venture Capital :
Financing for new businesses. In other words, money provided by investors to start-up firms and small businesses with perceived, long-term growth potential. This is a very important source of funding for start ups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.
Vested Interest :
- The lawful right of an individual, or entity, to gain access to tangible or intangible property now or in the future. A vested interest is an entitled benefit which can be conveyed to a separate party. There is usually a vesting period before the claimant can gain access to the asset or property. Due to the right of ownership the benefit can not be taken away i.e. the vested funds are not contingent on any action or inaction.
2. A financial or personal stake one entity has in an action, separate entity or commitment, with the expectation of realized benefits in the present or the future.
Generally, non-forfeitable rights accrue based on the number of years of service performed by the employee. The exact requirements are specified in the plan document, which also contains any applicable regulations. Employees are always 100% vested in salary-deferral contributions as well as SEP and SIMPLE employer contributions.
- A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.
2. A variable in option pricing formulas showing the extent to which the return of the underlying asset will fluctuate between now and the option’s expiration. Volatility, as expressed as a percentage coefficient within option-pricing formulas, arises from daily trading activities. How volatility is measured will affect the value of the coefficient used.
A derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue as a “sweetener” to entice investors.
Waterfall Concept :
A life insurance plan that provides a tax benefit in regards to intergenerational transfers of wealth. The concept occurs when a tax-exempt insurance policy is rolled over to a child or a grandchild. The origin of this term is derived from the fact that this insurance plan is similar to waterfalls in that it only flows downwards.
Weighted Average/Weightings :
An average in which each quantity to be averaged is assigned a weight. These weightings determine the relative importance of each quantity on the average. Weightings are the equivalent of having that many like items with the same value involved in the average. To demonstrate, let’s take the value of letter tiles in the popular game Scrabble.
Value: 10 8 5 4 3 2 1 0
Occurrences: 2 2 1 10 8 7 68 2
To average these values, do a weighted average using the number of occurrences of each value as the weight. To calculate a weighted average:
1. Multiply each value by its weight. (Ans: 20, 16, 5, 40, 24, 14, 68, and 0)
2. Add up the products of value times weight to get the total value. (Ans: Sum=187)
3. Add the weight themselves to get the total weight. (Ans: Sum=100)
4. Divide the total value by the total weight. (Ans: 187/100 = 1.87 = average value of a Scrabble tile)
Whole Life Policy :
A type of life insurance contract that provides for insurance coverage of the contract holder for his/her entire life. Unlike term life insurance, which covers the contract holder until a specified age limit, a traditional whole life policy never runs out. Upon the inevitable death of the contract holder, the insurance payout is made to the contract’s beneficiaries. These policies also include an investment component, which accumulates a cash value that the policyholder can withdraw or borrow against.
Windfall Tax :
A tax levied by governments against certain industries when economic conditions allow those industries to experience above-average profits. Windfall taxes are primarily levied on the companies in the targeted industry that have benefited the most from the economic windfall, most often commodity-based businesses. Windfall taxes will always be a contentious issue debated between the shareholders of profitable companies and the rest of society. This issue came to a head in 2005, when oil and gas companies, such as Exxon Mobil who reported profits of US$36 billion for the year, experienced unusually large profits due to rising energy prices.
Working Capital :
A measure of both a company’s efficiency and its short-term financial health. The working capital ratio is calculated as: WORKING CAPITAL=ASSETS-LIBS.
Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory).
Also known as “net working capital”.
A reduction in the value of an asset or earnings by the amount of an expense or loss. Companies are able to write off certain expenses that are required to run the business, or have been incurred in the operation of the business and detract from retained revenues.
For example, if you spend mone on dinner to take out a client, that meal is a possible write-off towards your income because you presumably discussed business opportunities during the dinner. Suppose, for another example, you made a sale on credit to a customer, but two weeks later the client’s business declared bankruptcy and became completely unable to pay off the credit account with you. This uncollectible debt would then be written off by your company and recorded as an expense by accountants.
The seller of an option who collects the premium payment from the buyer.
3-6-3 Rule :
Slang used to refer to an “unofficial rule” under which the banking industry once operated, which alludes to it being non competitive and simplistic. The 3-6-3 rule describes how bankers would give 3% interest on depositors’ accounts, lend the depositors money at 6% interest and then be playing golf at 3pm. This alludes to how a bank’s only form of business is lending out money at a higher rate than what it is paying out to its depositors.
401(k) Plan (U.S.):
A qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pre tax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.