Putting it in layman's terms.
The language of investing can be complex, hard to understand, and confusing. This glossary provides clear, concise definitions of some of the commonly used terms.
Asset allocation is the process of dividing your investments among different classes of securities based on your tolerance for risk and your personal investment goals.
A period in which stock prices are generally declining over a prolonged period of time.
A period in which stock prices are generally increasing over a prolonged period of time.
The principal value of your investment is your capital.
Compounding is the process by which you earn income on your investment's earnings. For example, if you had $1,000 in an investment that earned 5% interest a year, after one year you would have $1,050. During the second year, you would earn interest on the $50 earned the first year as well as on the original $1,000. Over time, compounding can lead to significant growth in your investments.
Diversification is the process of spreading your investments among the investment choices offered in your retirement plan. When you diversify, you spread your dollars and your risk among a variety of fund asset classes (stocks*, bonds*, and cash) rather than just one.
A company or mutual fund* may distribute earnings to shareholders in the form of a dividend. You can choose to have your dividends automatically reinvested – to buy more shares or more units of a given mutual fund – or have them paid out to you as income.
By investing equal amounts of money at regular intervals regardless of whether share prices are moving up or down, you acquire more shares in periods of lower prices and fewer shares in periods of higher prices, actually reducing your average share cost. For instance, by making regular contributions to your savings or retirement plan through payroll deductions, you are benefiting from dollar-cost averaging.
Equity means ownership. It is the value of your assets (property, possessions, money and other). An equity security refers to common stock, representing ownership interest in a corporation.
Exchange Traded Fund
An investment fund traded on the stock exchange, holding various assets such as stocks, commodities and bonds. It usually tracks an index, such as the S&P 500 or TSX, which measures the ups and downs of stock and bond markets. Like stocks, ETFs can be bought and sold throughout the day at the current market price.
Fund of Funds
A mutual fund that invests in other mutual funds to help investors achieve greater diversification.
A growth fund seeks capital appreciation and invests in companies that the portfolio manager believes have strong prospects for future growth, but potentially higher risk.
An index fund attempts to mimic a particular financial index. Indexes measure the ups and downs of stock and bond markets, reflecting market prices and the number of shares outstanding for the companies that compose the index. An individual cannot invest directly in an index.
Inflation is the rise in the cost of goods and services that causes a loss in the dollar's purchasing power. Inflation is frequently measured by the percentage change of the Consumer Price Index (CPI).
Investment Time Horizon
Your investment time horizon is the projected length of time your money will be invested.
Liquidity is the ease of turning an investment to cash. For example, a savings account is more liquid than real estate or a locked-in term deposit.
Load refers to a sales charge imposed by some mutual funds*.
Management Expense Ratio (MER)
For a mutual fund, the management expense ratio is the percentage that shareholders pay for the fund's operating expenses and management fees. The amount is taken out of the fund's current income before making distributions to shareholders and is disclosed in the fund's prospectus and annual report.
Market value is the price a buyer is willing to pay and a seller is willing to accept at any given moment for a particular security. Since market values are constantly changing, the current market value may be more or less than the price of your original investment.
A mutual fund is a collection of stocks, bonds or other securities managed by professional portfolio managers with a stated investment goal such as growth, income, or some combination of the two. All investors in a particular fund share in both the expenses and the potential profits of the mutual fund.
In general, principal refers to the amount of your original investment.
Risk is the chance that your investment could decline in value. If you are prepared to accept greater risk, you have the chance of getting higher returns or profit on your money. Low-risk investments, while generally safer, do not usually produce as high a return.
A share is a unit of equity ownership in a mutual fund* or corporation.
A shareholder is the owner of shares of a mutual fund* or corporation.
Sometimes called "equity," a stock represents part ownership in a company. Stocks are sold in shares and their prices will fluctuate.
Your RRSP investments grow "tax-deferred," meaning you don't have to pay taxes on the earnings until you actually withdraw them. Pre-tax money invested in such a retirement plan is also "tax-deferred," because no income taxes were withheld before that money was deposited in the plan. However, this money is not "tax-exempt," or "tax-free," since you will eventually have to pay taxes on the investment or any earnings when you withdraw them from the plan.
Volatility is the tendency of an investment to experience price swings (ups and downs) over periods of time.
Yield represents the percentage of return you receive on your capital investment based on the amount that you invest or on the current market value of your investments.