Investment terminology

AAA

The highest rating given by credit reporting agencies indicating that a bond is a secure investment or that a company is creditworthy.

Accrued Income

Earned income that has not yet been received; for example mutual fund gains that accumulate and are taxed annually but are paid only at maturity.

Active Management

An investment strategy, the goal of which is to outperform a particular index or benchmark through asset allocation and/or the selection of specific securities.

Active Overlay

A portfolio that consists of long (purchased) and short (sold) securities, where the goal is to add value from active management.

Active Risk

Risk arising from active management that compares the volatility of the return to a particular benchmark.

ACWI

Acronym for All Country World Index.

Alternative Investments

Investments that do not fall into the category of traditional equities and bonds, for example hedge funds.

Asset

Anything owned by or owed to an entity that has monetary value, including cash, securities, equipment and real estate.

Asset Allocation / Asset Mix

The distribution of investments among different classes of assets, normally on a percentage basis, in order to meet a specific investment objective. Asset mixing is a proven way to diversify a portfolio in order to limit risk.

Asset Classes

Different categories of investments, including stocks, bonds, real estate, cash etc.

Asset/Liability Modelling (ALM)

The analysis of future asset allocation approaches and their possible effect on liabilities, investment objectives and future financial position of a pension plan.

Audit

A verification and opinion of an organization's financial statements as provided by an unbiased professional, such as an accountant. The auditor's report normally indicates if the organization's records conform to accepted practices.

Balance Sheet

A summary of a company's finances as of a given date, which shows its net worth, what it owns (assets) and what it owes (liabilities).

Base Currency

The currency used in the country in which the investor is located.

Basis Point

One hundredth of a percentage point (100 basis points equals 1 percent). Used to measure small differences or changes, e.g. bond yields or interest rates which tend to fluctuate often within 1 percent.

Bear Market

A market characterized by falling stock prices over a period of time. Opposite of a Bull Market.

Benchmark

A point of reference used as a basis for evaluation or comparison. An index can be used as a benchmark against which the performance of a portfolio of assets can be measured or compared.

Beta (ß)

A measure of systematic (market or non-diversifiable) risk, as distinct from other measures of risk that can be reduced or eliminated through diversification.

Bond

Debt issued by a corporation or government, which provides a promise to the holder that the principal and a specified amount of interest will be repaid within a specific period of time. Investing in a bond is akin to lending money to a government or organization in return for interest and principal. See Fixed-Income Securities.

Bond Fund

A fund that invests primarily in bonds.

Bottom Up

An investment strategy that builds portfolios of securities based on the characteristics of the securities themselves and not on the industry, sector or geographical region in which they are traded. Opposite of Top Down.

Broker

An individual or firm that can act as an agent for or intermediary between a buyer and a seller of a security, usually for a fee. Brokers can also purchase or sell securities for their own accounts, in this case, they act as principals rather than agents.

Bull Market

A market characterized by rising stock prices or a prolonged period of growth. Opposite of a Bear Market.

Capital

Refers to cash, property and other financial assets used in a business.

Capital Loss

Loss from the sale of assets classified as capital assets under federal income tax legislation including stocks, real estate and other investments.

Capitalization

The value or market price of a company, or the money invested in a company. A company's Market Capitalization is the total market value of a company's shares, calculated by multiplying the price per share by the number of shares outstanding.

Cash

Currency, bank balances, money orders and cheques possessed by a company.

Cash Equivalent

Liquid investments such as T-Bills and Money Market Funds that can be easily converted into cash.

Commercial Paper

Short-term unsecured debt instrument or promissory note issued by banks, corporations or other borrowers.

Commission

Fee charged by a broker acting as an agent, or other agent for buying or selling securities on behalf of a client, often based on a percentage of the security's value.

Commodities

Typically, raw materials such as natural resources and agricultural products that are traded, usually through futures contracts. The price of commodities is usually based on supply and demand.

Common Stocks or Shares

Securities that give part ownership and possible voting rights in a company to the holder.

Compound Interest

Method of calculating interest on the principal as well as on previous earned interest. Compounding increases the value of investments over time.

Compound Rate of Return

A measure of the year-over-year growth rate of an investment.

Contingency Fund or Reserve

An amount set aside for emergencies, future needs or to guard against possible losses.

Convertible Bond

Bonds issued by corporations that, under specific conditions, can be exchanged or converted to another security or stock from the same company.

Core Style

An investment strategy that reflects the main characteristics of a market index and does not follow a particular style (i.e. growth or value).

Corporate Bond

Bonds issued by a corporation, rather than a government or government agency.

Correlation

A measure that describes how changes in the values of assets and/or liabilities are related to one another.

Coupon

Certificate attached to a bond that represents interest payments that will be made on certain dates.

Credit Risk

The risk of adverse economic consequences due to a borrower's or counterparty's inability to fulfill all or part of its obligations under a debt or other financial agreement.

Custodian

Financial institution or trust which holds and safeguards the assets and trades of a client.

Debenture

An unsecured bond or loan which is normally backed only by the integrity and creditworthiness of the borrower.

Debt

Money that is borrowed. The borrower is obliged to repay the principal plus a specified amount of interest by a pre-established date.

Deflation

A decline in the prices of goods and services. The opposite of Inflation.

Derivatives

Financial instruments or investments such as options, futures or swaps that "derive" their value from the performance of an underlying security or index. For example options are derivatives because they have underlying stocks or assets on which their prices are based.

Discount Rate

The interest rate used to determine the present value of a future cash amount.

Dividend

Payment distributed to shareholders out of a company's profits, proportionate to the number of shares they hold, in the form of cash or additional shares. The dividends of common shareholders may fluctuate based on the company's performance while those of preferred shareholders are normally fixed.

Duration

The change in the value of a fixed income security that will result from a 1% change in interest rates. Duration is stated in years. For example, a 5 year duration means the bond will decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%. Duration is a weighted measure of the length of time the bond will pay out. Unlike maturity, duration takes into account interest payments that occur throughout the course of holding the bond.

EAFE

Acronym for Europe, Australia and the Far East, commonly used to describe an international equity portfolio that focuses on developed markets in these areas. The EAFE index is commonly used as a benchmark for international investments.

Earnings

A company's net income or profit, generally used as indicator of future growth, potential dividends and, ultimately, stock prices.

Economic Indicators

Statistical data that provides a measure for the state of the economy (e.g. the Consumer Price Index, housing prices, stock market prices and bankruptcies).

EM

Acronym for Emerging Markets.

Equity

Common and preferred stock that represent a share in the ownership rights of a company and the right to collect dividends from profits. The term "Equity" can also refer to the net worth of a company.

Exchange Rate

The price of converting one country's currency to the currency of another country. A "floating" exchange rate is normally determined by market conditions while a "fixed" rate is one that is held at one level regardless of the market.

Financial Planning

Involves setting short- and long-term financial goals that may involve investments as well as retirement, income tax and estate planning.

Fiscal Year

The financial or accounting year of a corporation. A Fiscal Year is normally a 12 month period that may or may not follow the calendar year. At the end of a fiscal year, companies usually calculate their year-end profits and losses.

Fixed-Income Securities

General term for investments that pay a predictable stream of interest and generate income that does not vary over the life of the investment. Normally in the form of bonds, debentures and mortgages.

Forward Contract

A negotiated commitment or agreement to buy or sell an asset or commodity at a set date in the future for a specific price. Similar to futures contracts, however forward contracts trade "over the counter " and not on an exchange.

Funding Level

A ratio of the fund's assets to its liabilities, indicating the fund's ability to meet future liabilities when they fall due.

Futures Contract

A commitment or agreement to buy or sell an asset or commodity at a set date in the future for a specific price. Similar to forward contracts, however futures contracts are standardized, are not negotiated and are traded on a futures exchange.

Growth at a Reasonable Price (GARP)

An investment style that identifies companies that are somewhat underpriced and that have the potential to achieve higher returns relative to the overall market.

Growth Style

An investment style that builds portfolios with securities that have the potential to achieve above average earnings growth, with limited consideration paid to the current price of the security.

Guaranteed Investment Certificate (GIC)

Securities or deposit instruments issued by financial institutions that require a minimum investment and that pay a specified rate of interest for a specified term.

Hedge

An investment strategy used to limit risk and protect against market volatility by making transactions that oppose existing positions or by taking an offsetting position in a related security.

Index

A statistical yardstick against which the performance of the stock market or groups of securities is compared. For example, the S&P 500 is a common stock market index that measures the performance of 500 large U.S. firms in various market sectors and is considered an indicator of the U.S. market as a whole. Economic indexes, such as the Consumer Price Index, are also used to track the rise and fall in value of goods and services and are an indicator of inflation.

Index Fund

A passively managed portfolio weighted to duplicate a specific index in order to match the performance of that index. 

Inflation

Occurs when purchasing power declines due to increase in the prices of goods and services based on a percentage change in the Consumer Price Index.

Institutional Investor

Organization or investment manager that invests funds on behalf of institutional parties such as pension funds, insurance companies and banks, as opposed to individual or retail investors.

Interest

Money charged to a borrower by a lender for a loan or investment. Also refers to the return earned on funds that have been loaned or invested. The interest rate is normally a percentage of the debt over a period of time.

Investment

The purchase of items of value in order to earn income and/or increase capital. Investments can include income-producing vehicles such as bonds as well as assets such as real estate.

Investment Advisor

Qualified individual who provides counsel and advice regarding investment purchases, asset allocation and trade regulations on behalf of a client.

Investment Committee

Sub-group of a pension plan's Board of Trustees which oversees the management of the plan's investments and the appointment of investment managers.

Investment Manager

Organization or individual responsible for building portfolios, investing and/or managing assets on behalf of a client. May be responsible (as Fund Manager) for ensuring client portfolios are invested according to investment rules and are in line with an agreed-upon asset allocation mandate. Specialist managers are responsible for specific aspects of a portfolio based on their strengths and experiences (e.g. Currency Overlay Manager, International Growth Manager, etc.).

Investment Objective

The desired goal or outcome of an investment strategy (e.g. long-term growth and safety of capital).

Investment Performance

The results produced by an investment over a given period of time.

Investment Strategy

An action plan for achieving an Investment Objective or goal through the allocation of funds among various asset classes and securities. Most strategies take into consideration factors such as Risk Tolerance and Time Horizon.

Large Cap Stock

Stocks of companies that have the largest capitalization in their market.

Leverage

The use of borrowed funds or debt to increase potential investment returns. The investment gain is magnified because it is not measured against the total investment - only against the portion that was not borrowed.

Liabilities

The debts and financial obligations of a company either current (payable within one year) or long-term (payable after one year) such as salaries, taxes and money owed. The concept also applies to pension plans and reflects the benefit promises of the plan (i.e. future pension payments).

Liquidity

The ease with which investors can convert securities into cash. Also refers to a corporation's cash position - its assets relative to its liabilities.

Long or Long Position

Signifies that an investor has ownership of a security and is entitled to receive any dividends from it, to sell it for profit or transfer it.

Market Value / Market Price

The most recent price at which a security was bought or sold.

Maturity

The date on which a loan, bond or other interest-paying investment comes due and must be repaid.

Mid Cap Stock

Stocks of companies that are in the middle range capitalization in their market.

Money Market

A market for the buying and selling of short-term financial obligations and securities, such as T-Bills with maturity dates of less than 1 year.

Nasdaq

An automated network (electronic stock market) used for trading Over the Counter stock, with an emphasis on high tech and developing companies. Originally referred to as NASDAQ (an acronym for the National Association of Securities Dealers Automated Quotations System), it also refers to several indices (e.g. NASDAQ-100 Index , NASDAQ Composite Index).

Nominal Interest Rate

The rate of simple interest on a debt or a bond that ignores any impact from inflation.

Option

The right to buy or sell a specified amount of securities at a certain price within or at the end of a stipulated time period. A "put option" gives the holder selling rights while a "call option" gives buying rights.

Over the Counter (OTC)

Principal market for bonds and some stocks that are not traded on a recognized exchange. Normally brokers and dealers trade directly by phone or electronically. Also known as an Unlisted Market.

Passive Management

Style of management which tries to match a particular index or benchmark performance, by attempting to duplicate the structure of its composition rather than attempting to surpass it. Passive management strives to achieve long-term returns with limited portfolio maintenance and at a lower cost.

Portfolio

The combined holdings of individuals or organizations that may contain a variety of investments and securities such as bonds, stock, cash, real estate and other assets. Portfolios are normally managed by a Fund or Portfolio Manager and contain securities from various companies, sectors and regions in order to reduce risk through diversification. Portfolios can range from aggressive to conservative, depending on the Investment Objectives and Risk Tolerance of the investor.

Preferred Stock or Shares

Securities that entitle the holder to a specified rate of dividend that is paid before dividends to common shareholders are paid. Preferred shareholders normally have a priority claim on assets in the event of the liquidation of a company.

Present Value

The value today of a future sum of money or cash flow, given a specified rate of interest.

Price to Earnings (P/E) Ratio

Used as a measurement of the value of a stock and a method for comparing stocks within industries. Calculated by dividing the current price of common shares by the company's earnings per share for a 12-month period.

Principal

The original investment amount or capital (not including earned interest) or the face amount of a bond.

Private Equity

Equity capital invested in a private company or made available to companies or investors outside of the stock market.

Proxy

Authorization given by shareholders delegating another shareholder or manager the rights and responsibilities to represent the holder and vote the holder's shares at shareholders meetings.

Quartile

Statistical ranking used to measure the performance of a fund or manager. A quartile is one quarter of the total population; therefore a fund with a ranking in the first quartile (Top Quartile) is seen to outperform 75% of the market.

Real Interest Rate

The amount by which the nominal interest rate exceeds the expected rate of inflation. The real interest rate is approximated by subtracting the inflation rate from the nominal interest rate.

Real Return Bonds

A bond that pays interest based on a real interest rate, i.e., a rate adjusted for changes in the Consumer Price Index . Also known as inflation-linked bonds.

Rebalancing

The process of realigning or adjusting a portfolio to reflect the changes in performance of different assets over time and to remain on track with investment goals.

Return

Also known as Rate of Return. The amount gained or lost on an investment over a period of time, normally as a percentage of initial investment. Real Return is a return that has been adjusted for inflation.

Return on Investment (ROI)

A measurement of the profitability of a company based on income in the fiscal year divided by stock equity and debt. Sometimes used in place of Return.

Risk

The measurable possibility of a future investment loss or a gain that is less than expected, including the possibility of losing some or all of the original investment.

Risk Tolerance

The amount of risk that an investor is prepared to accept, given the potential return. The Risk Tolerance of each investor is affected by such influences as Time Horizon and Investment Objectives

S&P 500 Index

An index made up of 500 widely-held stocks in mid and large-cap companies, which are considered to be representative of the US equity market. The performance of this group of stocks is generally used as a benchmark for the overall performance of the US stock market.

S&P/TSX Composite Index

A benchmark index made up of the largest capitalization stocks on the Toronto Stock Exchange, normally used as an indicator of the performance of the overall Canadian equity market. This is the successor to the TSE 300 Index.

Securities

Transferable investment products represented by certificates or documents of ownership or claim on income payments. Stocks, bonds, mortgages, derivatives, certificates of deposit and options are all examples of securities.

Settlement

The completion of a transaction between the buyer and seller of a security.

Shareholder

Individual or entity that owns one or more shares in a corporation.

Shares

Certificate that represents ownership or units of ownership in a corporation and specific rights and claims on assets. Often referred to as stocks or equities.

Short or Short position

Signifies that an investor does not actually have ownership of the security that he or she is trading.

Short Selling

The sale of a borrowed security in anticipation that the price of the security will decline and that a profit can be made by buying back the security at a lower cost (and returning it to the lender) in the future.

Small Cap Stock

Stock of companies that are in the lowest market capitalization range in the market.

Standard Deviation (SD)

A statistical measure of the historical volatility of a fund in relation to its expected return or its return relative to another fund or benchmark.

Statement of Investment Policies and Procedures (SIP&P)

Plan document that details the financial strategy and investment goals of a pension plan.

Stock

A share of ownership in a company, which provides the holder with specified rights to the company's assets. (See Common Stock and Preferred Stock)

Stock Exchange / Stock Market

A marketplace for buying and selling securities. The TSE (Toronto), the NYSE (New York), NIKKEI (Japan) and the London Stock Exchange are some of the major exchanges worldwide.

Swap

An arrangement that enables investors to make an exchange for their mutual benefit. For example, an interest rate swap allows one party to trade a floating interest rate for another party's fixed rate in order to take advantage of lower rates.

Tax Shelter

Investments that offer some form of income tax protection in the form of deductions, deferrals or credits.

Tax-Deferral

Investments that can accumulate earnings tax-free until a specific time, usually once the term has expired, at which time taxes must be paid.

Term

Period of time, usually referring to the time remaining until the final payment for a bond.

Ticker or Trading Symbol

Systems of letters that represent the names of listed stocks traded on a stock exchange.

Time Horizon

Also known as Investment Horizon. This is the period of time in which a sum of money is expected to be invested in order to meet Investment Objectives. Time horizon has an effect on the amount of risk that an investor is willing to take and the composition of the asset mix in a portfolio. Generally, the shorter the Time Horizon, the more conservative the investment.

Top Down

An investment strategy that builds portfolios of securities based on the country, region, sector or industry in which they operate as well as on economic and other factors. This approach pays little to no attention to the specific issuer of the securities. Opposite of Bottom Up.

Toronto Stock Exchange (TSX)

Canada's largest stock exchange, formerly referred to as the TSE.

Total Return

Overall gain in an investment or portfolio, including interest, dividends and earned income, less any losses.

Treasury Bill (T-Bill)

Short-term security offered by a government for terms of up to one year. T-bills pay no interest but are offered at a discount.

Trust

A legal arrangement in which one individual or trust company is responsible for holding and managing the assets for the benefit of another.

Trustee

An individual or organization with the legal title to and fiduciary obligation for the assets of another.

Value Style

An investment strategy that builds portfolios of securities that are believed to be undervalued in the market and that trade for less than their intrinsic worth.

Volatility

A measure of the rate or degree that the price of a security or investment fluctuates over time, normally used as an indicator of risk.

Voting Rights

The entitlement of stockholders, as part owners, to have a say in company affairs such as the composition of the board of directors and policy issues. 

Weighting

The amount (usually percentage) that a specific variable represents overall. For example, the proportion of exposure that a specific asset, region or sector represents in a portfolio, compared to the benchmark against which the portfolio is measured.

Yield

A measure, in percentage, of the return, annual income or dividend from an investment.

Yield to Maturity

Also known as Redemption Yield. The yield on a fixed income security such as a bond, assuming it is held until maturity will tend to differ from the coupon rate due to fluctuations in market conditions.

Zero Coupon Bond

A bond that pays no interest (coupons), is sold at a discount and which matures at face value.