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Performance of Our Signature Funds

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Glossary of investment terms

Adjusted cost base (ACB)

The book value of a security based on the initial investment cost, additional contributions and reinvested amounts. The ACB is used to determine a security’s cost for tax purposes.

Annuity

An insurance product that makes monthly payments for a specified period, or for life. An annuity may be suitable for those who have no pension or are concerned about outliving their money.

Asset allocation

A portfolio’s mix of equities, fixed income, cash and other asset classes. Your asset allocation is determined by your return objectives, risk tolerance, income needs, and other factors.

Buy and hold

A disciplined investing strategy that is based on holding stocks and other assets in your portfolio for a long period of time, regardless of the ebbs and flows of the market.

Capital gain (loss)

The difference between the price you receive when selling an asset and its adjusted cost base. A capital gain is the profit you make when you sell a stock for more than you paid. A capital loss occurs when you sell for less than you paid. Capital gains are taxed at half the rate of regular income, and they can be offset with capital losses.

Common share

A security representing part ownership of a company. Common shareholders can normally vote for the board of directors and are entitled to approve dividends after bondholders and preferred shareholders. See also preferred share.

Deemed disposition

The assumed sale of an asset for tax purposes, even if no actual sale has taken place. For example, when you die, cease to be a Canadian resident, or transfer stocks from a non-registered account to a registered account, capital gains taxes may be payable just as if you had sold the stocks.

Discount brokerage

A firm that allows you to buy and sell securities (online or by phone) at a lower cost than a full-service brokerage. Discount brokerages are not usually allowed to provide advice on securities: they simply take your order and execute.

Diversification

The practice of spreading out investments across different securities, sectors and asset classes in order to reduce risk.

Dividend

A distribution paid to a company’s shareholders. Dividends are payable to the holders of preferred shares according to set formula, and to common shareholders when approved by the board of directors.

Dividend reinvestment plan (DRIP)

An arrangement whereby an investor can receive dividends in the form of new shares rather than in cash. DRIPs can be set up directly with certain companies, or through a brokerage. Participating in a DRIP allows your investment to compound more quickly.

Dividend tax credit

A credit you can claim on your tax return that reduces the amount of tax you pay on dividends from Canadian companies.

Dollar-cost averaging (DCA)

The practice of investing equal amounts of money at regular intervals instead of a lump sum. Dollar-cost averaging reduces the risk of making an ill-timed investment decision.

Earnings per share (EPS)

A company’s net income divided by the number of shares outstanding.

Emerging markets

Countries whose stock markets are considered less developed, such as China, India, Brazil and Russia.

Exchange-traded fund (ETF)

An investment fund that holds a basket of stocks, bonds or other securities and trades on a stock exchange. Traditional ETFs are index funds, which offer a low-cost way of building a diversified portfolio without selecting individual stocks or bonds.

Fair market value (FMV)

The price an asset is worth in the marketplace.

Fixed income

Assets such as bonds and GICs that pay a fixed rate of interest to the investor.

Full-service brokerage

A firm that buys and sells stocks on your behalf and offers professional advice on investments. Accordingly, full-service brokerages charge higher fees than discount brokerages.

Fundamental analysis

A method of evaluating stocks by looking at a company’s earnings, sales, profits and related factors.

GIC laddering

A strategy of investing in long-term Guaranteed Investment Certificates (GICs) but staggering the maturity date, so that not all of your money is locked in for the same length of time.

Gross domestic product (GDP)

The value of all goods and services produced in a country.

Gross-up

The amount that must be added to eligible Canadian dividends before reporting them as income. The gross-up for the 2012 tax year is 38%, which means $100 in Canadian dividends must be reported on your tax return as $138 in income. The dividend tax credit then applies to this grossed-up amount.

Guaranteed Investment Certificate (GIC)

An investment sold by a financial institution that pays a fixed rate of interest for a set period, usually one to five years. GICs are normally guaranteed by the federal or provincial government.

Index

A selected number of stocks or bonds used to represent an asset class or segment of the market. For example, the S&P/TSX Composite Index is made up of approximately 260 stocks and is frequently considered a proxy for the entire Canadian stock market.

Index fund

A mutual fund or ETF that attempts to match the returns of an asset class or market segment by holding all the stocks or bonds in an index.

Large-cap stock

A public company with a large market capitalization. While there are no hard rules, the cutoff for U.S. companies is often considered $10 billion. In Canada, companies may be considered large caps when they reach $3 billion or so. See also small-cap stock.

Margin account

An investment account with a discount or full-service brokerage that allows you to buy stocks on credit.

Marginal tax rate (MTR)

The amount of tax you pay on the next dollar you earn, which varies according to your income and the province you live in.

Market capitalization

A company’s stock price multiplied by the number of outstanding shares.

Market order

An order placed on a stock exchange to buy or sell a stock at the current market price.

Market timing

An investing strategy that involves making buying and selling decisions based on your expectations of how the markets will perform in the near future. The term usually refers to moving from stocks to cash and vice-versa, based on technical indicators or market forecasts.

Non-registered account

An investment account that is not sheltered from taxes. Also known a taxable or open account. See also registered account.

Overweighting

The decision to hold a significant portion of a portfolio in one sector or stock you believe will outperform.

Preferred share

A security providing the investor with a fixed dividend that must be paid before dividends to common shareholders. If a company is liquidated, preferred shareholders rank ahead of common shareholders but behind bondholders. Canadian preferred to receive favorable tax treatment in taxable accounts. See also common share.

Registered account

Any of several investment accounts that offer some form of tax sheltering, such as a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA).

Registered retirement savings plan (RRSP)

An investment account that allows you to save for your retirement on a tax-deferred basis. Contribution limits are set according to your income and are tax-deductible. All growth and income accumulates tax-free in the account until you withdraw it.

Registered retirement income fund (RRIF)

An investment account that allows you to shelter growth from taxes during retirement but also requires minimum annual withdrawals.

Return of capital (ROC)

A payment made by a company, trust, or mutual fund that (unlike a dividend or interest payment) consists of part of your original investment being returned to you. Return of capital is not taxable when it is received, but it lowers the adjusted cost base of your investment, which may result in a capital gain in the future.

Risk-free rate

A rate of return that can be achieved by a safe investment, such as Treasury bills. The risk-free rate is used in the Capital Asset Pricing Model to determine the additional return you should expect from a risky investment.

Security

A tradable financial instrument such as a stock, bond or option.

Short selling

A technique whereby an investor borrows a stock and then sells it, with the intention of repurchasing it later at a lower price. Short sellers hope to make a profit on stocks they believe will fall in value.

Small-cap stock

A public company with a small market capitalization. While there are no hard rules, the S&P/TSX Small Cap Index sets the range at $150 million to $1.5 billion. See also large-cap stock.

Stock

A security that grants partial ownership of a company to an investor. Stockholders typically have voting rights and are kept informed of the firm’s assets and earnings. Some companies also pay dividends (a percentage of the company’s earnings) to their shareholders.

Stock purchase plan

A program that allows investors to purchase a company’s shares directly, without a brokerage, and often at a discount.

Stock split

A decision by a company to increase its number of shares outstanding while keeping the total value of those shares the same. For example, if a company announces a two-for-one stock split, a shareholder who had 100 shares worth $50 each would end up with 200 shares valued at $25 each.

Tax-free savings account (TFSA)

An investment account that allows all growth and income to accumulate tax-tree. Contributions receive no tax deduction but all withdrawals can be made tax-free.

Technical analysis

A method of trying to predict the stock market’s future performance based on past changes in price and trading volume.

Ticker symbol

A one- to five-letter symbol used to identify a company on a stock exchange.

Value stocks

Companies that appear to be underpriced based on a number of fundamental factors, such as low price-to-earnings and price-to-book ratios or high dividend yield.

Yield

The income generated by a stock or bond. A stock’s yield is its annual cash dividends divided by its current price.

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