Alpha

Alpha is the unique return expected on a security, independent of market conditions. In modern portfolio theory, alpha represents the amount of return produced by the stock, on average, independent of the return on the market.

Annuity

An annuity is an investment vehicle usually offered by insurance companies and is designed to provide regular periodic payments to the policyholder for a specified period of time.
Annuity rates fluctuate with interest rates and generally, it is best to purchase an annuity when rates are historically high. If you purchase an annuity when interest rates are low, you may find that your income may not be sufficient for retirement.
Annuities are not flexible investments and once purchased, cannot be reversed.

Arithmetic Mean

Arithmetic Mean is a value that is computed by dividing the sum of a set of terms by the number of terms.

Asset Mix

Assets are distributed among stocks, bonds, and money-market instruments (treasury bills, certificates of deposit, short-term government bonds, and commercial paper).

Back-End Load

A charge for withdrawing shares from a mutual fund.

Balanced Mutual Fund

An investment fund that usually includes bonds, debentures, or preferred shares, in varying ratios with common stocks.

Balance Sheet

A document detailing a company's assets and liabilities. The two quantities that have to "balance" or equal each other are (1) assets and (2) the sum of liabilities and shareholders' equity; ie the total amount of assets the company controls is equal to what they own plus what they've borrowed.
The balance sheet is interesting to stock investors because it provides details on the actual assets that make up a stock's book value.

Bear Market

A prolonged period of falling prices. A bear market in stocks is usually brought on by the anticipation of declining economic activity, and a bear market in bonds is caused by rising interest rates.

Beta

Beta is a measure of a stock's or a portfolio's volatility that is expressed numerically as deviation from the market's volatility taken as unity.

Bond Mutual Fund

An investment fund predominantly made up of bonds and debentures.

Bonds

Certificates issued by borrowers, usually governments or corporations. A bond will normally have a fixed interest rate and a set maturity date, at which time the principal will be repaid in full. A typical bond will have interest coupons attached which are redeemed annually or semi-annually.

Broker

A person who acts as an intermediary in the purchase of securities or insurance.

Bull Market

A prolonged rise in the prices of stocks, bonds, or commodities. Bull markets may last from a few months to several years and are characterized by high trading volume.

Cash Surrender Value

The amount of cash a person may obtain by voluntarily surrendering a life insurance policy.

Consumer Price Index

A statistical device that measures the change in the cost of living for consumers. It is used to illustrate the extent that prices have risen or the amount of inflation that has taken place.

Deferred Sales Charge(DSC)

Often referred to as a redemption charge or a back-end load, this is a fee that is applied to withdrawals (redemptions) that occur during a specified Deferred Sales Charge period. The amount of the fee is specified in the fee schedule and is different for every fund company. It is generally higher in the early years and usually starts at 7 to 8%. The fee schedule decreases annually but can run as long as 8 years. The reason that fund companies charge a redemption fee in the first place is to recover costs that they would have already paid out to the advisor in the form of a commission. Most fund companies pay advisors 5% commission up front for mutual funds sold on a deferred-sales charge basis.

Defined Benefit Pension Plan

A registered pension plan that guarantees a specific income at retirement, based on earnings and the number of years worked.

Defined Contribution Pension Plan

A registered pension plan that does not promise an employee a specified benefit upon retirement. Benefits depend on the performance of investments made with contributions to the plan.

Earned Income

For tax purposes, earned income is generally the money made by an individual from employment. It also includes some taxable benefits. Earned income is used as the basis for calculating RRSP maximum contribution limits.

Extendible Bond or Debenture

A bond or debenture issued with a specific maturity date, but granting the holder the option to extend the maturity date by a specified number of years.

Face Value

The value of a bond or debenture that appears on the face of the certificate. Face value is the amount the issuer promises to pay at maturity. Face value is no indication of market value. For example, a low grade bond may have a face value of $1000 but can trade at a market price of $130.

Financial Intermediary

An institution such as a bank, life insurance company, credit union or mutual fund company which receives cash and invests it on behalf of the suppliers of the cash.

Financial Planners

Professionals who specialize in preparing financial programs for individuals, covering such matters as investments, tax planning, retirement preparation, estate planning, and income generation. Some charge an hourly fee while others make their revenue through commissions on the sale of securities, including mutual funds.

Fiscal Policy

The policy pursued by the federal government to direct the economy through taxation and the level and allocation of government spending.

Fixed Income Mutual Fund

A fund that invests in securities which pay interest at a fixed rate, such as bonds.

Flow-Through Shares

Tax deductions and credits, normally available only to a corporation, are given to the owners of the corporation's flow-through shares. Canadian exploration and mining companies are able to issue such shares at a premium because investors are considered to be funding exploration and development costs and are therefore entitled to deduct these expenses from all other income.

Fiduciary

An individual or institution occupying a position of trust. An executor, administrator or trustee. Hence, "fiduciary" duties.

Fiduciary Duty

In the case of the financial planning industry, an advisor has a fiduciary duty to his client. In other words he must put his clients interests first and at all times act with the best interest of the client.

Is the fee or commission applied to a mutual fund at the time of initial purchase, it is used to compensate an advisor for the sale of the mutual fund to the client. A front-end load is negotiable and can range from as low as 0% (no-load) to as high as 5%. The fee is usually deducted from the total amount invested.

Fundamental Analysis

A method of evaluating the future prospects of a company by analyzing its financial statements. It may also involve interviewing the management of the company.

Global Mutual Fund

A fund that invests in several countries, including its home nation. The fund may specialize in stocks, bonds, or money-market instruments.

Gross Debt Service (GDS) Ratio

The gross debt service ratio is the portion of the borrower's gross income that is required to make the monthly payment of principal , interest, taxes, heating costs and, if applicable, half of the condominium fees.

Guaranteed Insurability Benefit

The guaranteed insurability benefit is the life insurance contract rider that entitles the policyholder to purchase specific amounts of additional insurance of the same type as the original policy, on specific dates, without providing other evidence of insurability.

Growth Fund

An investment fund that seeks growth of capital as its primary objective. This type of fund invests primarily in common stocks and securities convertible into common stocks.

Guaranteed Investment Certificates (GICs)

Securities issued by financial institutions, such as banks and trust companies, for a specified term. GICs of up to five years issued by members of the CDIC are covered by deposit insurance up to $60,000.

Hedge

A strategy used by fund managers to limit investment risk.

Income Fund

An investment fund whose primary objective is current income. Such funds generally invest their assets in government, corporate, or other bonds. Some income funds may include high-yielding common stocks.

Index

A stock market index is an indicator that measures stock market trends. The most representative index of the Canadian market is the S&P/TSX.

Index Fund

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

Inflation

A condition of increasing prices. In Canada, inflation is generally measured by the Consumer Price Index.

Investment Income

Investment income refers to the yield on an investment. There are various types of investment income-interest income, dividend income and capital gains. The taxation rate differs according to the type of investment income.

Load

The fee charged by a mutual fund to investors to buy units (front-end load or acquisition fee) or sell units (back-end load or redemption fee).

Locked-In is a term associated with funds in an RRSP or RRIF.

Funds are termed locked-in when they may only be used to produce retirement income. Locked-in funds generally arise when an individual transfers the commuted value of benefits earned under an employer sponsored pension plan to an RRSP or RRIF. In this situation, the benefits earned under the pension plan were for retirement, so the government forces the commuted value to be used for retirement benefits by locking them in. Even if you want to withdraw locked-in funds prior to retirement to purchase a home or cottage, buy a boat, pay for school etc. you cannot. The locked-in amounts may only be used for retirement income.

(MER) is charged by a fund company before any returns are paid out to investors. The MER includes the portfolio manager's compensation and other expenses associated with running the fund. Management Fee + Fund Expenses = MER, which is stated as a percentage of the fund's average daily net asset value. MERs are calculated by adding the management fee to the accrued expenses (excluding brokerage and interest charges) and dividing the total by the fund's average net asset value for the relevant financial year.

The fees vary by fund company and fund type, with the lowest fees charged for money market and index funds, while sector and specialty funds are among the highest.

MERs are paid by the funds and are not charged directly to unit holders, but do reduce the available return. However, all published rates of return and unit prices have already accounted for these fees and expenses.

The date on which a loan or a bond or debenture comes due and is to be paid off.

Medium-Term Bond or Debenture

A bond or debenture which matures in more than three years, but less than 10.

Mortgage Backed Securities

Similar to bonds, these securities are backed by a share in a pool of home mortgages insured under the National Housing Act. The securities pay interest and a part of the principal each month and, if home owners prepay their mortgages, may pay out additional amounts of principal before normal maturity. They trade in the bond market at prices reflecting current interest rates.

Net Asset Value (NAV)

The value of mutual fund shares. It is normally calculated daily by subtracting a fund's liabilities from its assets and dividing by the number of shares outstanding.

No-Load Mutual Fund

A fund offered to the public that carries no purchase fee (front-end load) or redemption fee (back-end load).

Pension Adjustment

A pension adjustment (PA) exists if contributions to a registered pension plan (RPP) have been made on behalf of a contributor. When a contributor is a member of a RPP, the PA corresponds to the contributions made to the pension plan by the employee and the employer. The PA reduces the amount that a contributor may pay into his registered retirement savings plan (RRSP) . This amount is indicated on the T4 slip.

Pension Plan

A formal arrangement through which the employer, and in most cases the employee, contribute to a fund to provide the employee with a lifetime income after retirement.

Price-Earnings Ratio or PE Multiple(P/E)

This is a common stock's current market price divided by annual per share earnings. This ratio is a short way of saying that a share is selling at so many times its actual or anticipated annual earnings. A price-earnings ratio is one tool used to compare one share to another.

Prospectus

The selling document legally required to be distributed to mutual fund investors. A prospectus describes a fund's investment strategy as well as the risks and costs of the investment.

The nominal rate of interest minus the percentage change in the Consumer Price Index, or the rate of inflation.

Redemption

The right of a shareholder to sell, at any time, some or all of his or her shares back to the investment fund for cash.

Redemption Fee

Redemption fees are charged when units of a mutual fund are sold before the end of the redemption period.

Registered Education Savings Plan(RESP)

A plan that enables a contributor, on a tax deferral basis, to accumulate assets on behalf of a beneficiary to pay for a post secondary education.

Registered Investment

Any security that is held in a tax-sheltered plan approved by Revenue Canada.

Registered Pension Plan (RPP)

A RPP is a trust registered with Revenue Canada and established by a company to provide pension benefits for its employees when they retire. Both employee and employer contributions to the plan are tax deductible.

Registered Retirement Income Fund (RRIF)

A fund set up with proceeds from an RRSP to provide income during retirement.

Registered Retirement Savings Plan (RRSP)

A plan registered with Revenue Canada that encourages Canadians to save for retirement by providing tax relief on contributions and earnings.

Return

The amount of money earned by an investment.

Risk

The measurable possibility of losing or not gaining value. Risk is differentiated from uncertainty, which is not measurable.

Sales Charge

The amount of commission paid by an investor to a sales organization.

Self-Regulatory Organizations (SROs)

Many important rules governing securities industry practices and standards in Canada are set by the self-regulatory organizations, which include the Vancouver, Alberta and Toronto Stock Exchanges, the Montreal Exchange and the Investment Dealers Association of Canada. Many of the regulatory and compliance functions have been delegated to the SROs by the provincial securities administrators.

Share

A unit of ownership in a company.

Shareholder

Someone who owns one or more shares in a company.

Sharpe Ratio

A number measuring the reward-to-risk efficiency of an investment, used to create risk-efficient portfolios.
The definition of the Sharpe Ratio is:

S(x) = (rx - Rf) / StdDev(x)

where

x is some investment
rx is the average annual rate of return of x
Rf is the best available rate of return of a "riskless" security (ie cash)
StdDev(x) is the standard deviation of rx

Short Selling

The sale of a security made by an investor who does not own the security. The short sale is made in expectation of a decline in the price of a security, which would allow the investor to then purchase the shares at a lower price in order to deliver the securities earlier sold short.

Short Selling

The sale of a security made by an investor who does not own the security. The short sale is made in expectation of a decline in the price of a security, which would allow the investor to then purchase the shares at a lower price in order to deliver the securities earlier sold short.

Simplified Prospectus

An abbreviated and simplified prospectus distributed by mutual funds to purchasers and potential purchasers of units or shares.

Standard Deviation

Standard deviation is a measure of the degree of dispersion of the data from the mean value. Stated another way, the standard deviation is simply the "average" or "expected" variation around an average. A large standard deviation indicates that the data points are far from the mean and a small standard deviation indicates that they are clustered closely around the mean.

For example, The annual return of three different portfolio are {0, 5, 9, 14}, {0, 0, 14, 14}, and {5, 6, 8, 9}. Each have an average of 7, but the third set has a much smaller standard deviation than the other two because the annual returns are all much closer to 7. For informational purposes, the standard deviation of the three portfolios in order are 5.94, 8.08 and 1.83. It would stand to reason given that each portfolio has the same expected return of 7, a reasonable investor would choose the last portfolio because it has lower standard deviation.

Stock

Ownership in a corporation represented by shares that are a claim on the corporation's earnings and assets. Common stock usually entitles the shareholder to vote in the election of directors and other matters taken up at shareholder meetings or by proxy. Preferred stock generally does not confer voting rights but it has a prior claim on assets and earnings (dividends must be paid on preferred stock before any can be paid on common stock).

Style Drift

Often, funds that specialize in one style suffer when that style is out of favour. Portfolio managers may compensate by buying stocks outside their investment discipline. In other words, they do not stick to their mandate and instead shift investment strategies as the market shifts.

Switching

Moving money from one mutual fund to another.

Systematic Withdrawal Plan

Plans offered by mutual fund companies that allow unit holders to receive payment from their investment at regular intervals.

Tax Credit

An income tax credit that directly reduces the amount of income tax paid by offsetting other income tax liabilities.

Tax Deduction

A reduction of total income before the amount of income tax payable is calculated.

Technical Analysis

A method of evaluating future security prices and market directions based on statistical analysis of variables such as trading volume, price changes, etc., to identify patterns.

Tenants in Common

Account registration in which two or more individuals own a certain proportion of an account. Each tenant`s proportion is distributable as part of the owners estate, so that if one of the account holders dies, that owner`s heirs are entitled to that proportional share of the account.

Total Debt Service (TDS) Ratio

The total debt service ratio is the percentage of the borrower's gross annual income required to make the monthly payments associated with housing, as well as to satisfy all other debts, such as payments on a car loan.

Total Return

The total amount any investment returns, including any capital gains or losses and any dividends or interest.

Trailer Fee

An annual service commission paid by mutual fund companies to sales representatives. These fees generally range between 0.25% and 1% of customers' assets and are paid out of the fund's management expenses.

Transfer Fee

The price charged to transfer your assets to another company.

Treasury Bills

Short-term debt securities issued most commonly by the federal government.

Trust

A trust is a contractual institution through which a person (called a "trustee") is given the responsibility to administer the property entrusted to them up to a date on which they must restore such property to the beneficial owner.

Trustee Fee

A trustee is the individual or institution that holds the responsibility to administer the property entrusted to them. In Canada, a trustee must administer all registered accounts. In the case of portfolio4less.com, we have selected Canadian Western Trust to be the trustee for our client's accounts.

Underwriter

An investment firm that purchases a security directly from its issuer for resale to other investment firms or the public or sells for such issuer to the public.

Unit holder

Someone who holds one or more units in a mutual fund.

Universal Life Insurance

A life insurance term policy that is renewed each year and which has both an insurance component and an investment component. The investment component invests excess premiums and generates returns to the policyholder.

Vesting

In pension terms, the right of an employee to all or part of the employer's contributions, whether in the form of cash or as a deferred pension.

Volatility

The amount by which a fund's return varies over time; used as a measure of investment risk.

Wrap Accounts

An account offered by investment dealers whereby investors are charged an annual management fee based on the value of invested assets.

Yield

Income, usually interest, paid by a security on a regular basis.

Yield to Maturity (YTM)

A rate of return measuring the total performance of a bond (coupon payments as well as capital gain or loss) from the time of purchase until maturity.