Glossary of Terms
| Absolute return | Also known as Total Return. The return that a financial asset achieves over a prescribed time period. |
| Alpha | The amount an investment manager's performance exceeds the relative benchmark index |
| American Depositary Receipt (ADR) | A security listed on a U.S. stock exchange and denominated in U.S. dollars that represents part ownership of a company that is publicly traded outside the U.S. ADRs are a convenient way for U.S. investors to purchase shares in a non-U.S. company. |
| Amortization | The repayment of a loan over time through planned payments of principal and interest. |
| Annualized standard deviation | Annualized standard deviation is standard deviation expressed as an annual figure. |
| Arbitrage | The simultaneous purchase and sale of an asset (ie. a security, currency or commodity) to take advantage of different prices for that asset in different markets. |
| Asset allocation | A portfolio’s mix of equities, fixed income, cash and other asset classes. Asset allocation is determined by your return objectives, risk tolerance, income needs, and other factors |
| Balance sheet | A summary of what a company owns (assets), what it owes (liabilities), and the amount invested by shareholders, at a specific point in time. |
| Bank of Canada (BoC) | Canada's central bank. It's role is to manage inflation, promote a safe and efficient financial system, issue and distribute Canada's currency and act as the fiscal agent for the government. |
| Basis point | A basis point (bps) is 1/100th of a percent. E.g. 30 bps is equivalent to 0.03% |
| Bear market | A market in which prices fall 20% from the market peak over a two-month period. |
| Beta | A measure of the volatility of a stock (or portfolio of stocks) in comparison to the market as a whole. |
| Blue chip stock | A nationally recognized, well-established and financially sound company that have long records of stable and reliable growth through all types of economic conditions. |
| Bond | A type of fixed income security in which the holder loans money to a company or government for a defined period of time at either a variable or fixed interest rate. The bondholder is one of the issuer's creditors. |
| Book value | The value of a company determined by subtracting its liabilities and intangible assets (such as patents and goodwill) from its total assets. |
| Bull market | A market characterized by a sustained rise in prices for securities, such as stocks, and a change from investor pessimism to optimism. |
| Business Cycle Index (BCI) | An index that forecasts the strength of economic expansion or recession in coming months. It is a composite of leading, lagging and coincident indexes created by the U.S. Conference Board. |
| Buy and hold | An investing strategy in which the investor purchases securities and holds them for a long period despite market fluctuations. |
| Call options | A contract that gives you the right, but not the obligation, to buy a stock at a specified price within a certain time frame |
| Capital asset pricing model | A financial model that attempts to describe the relationship between an investment’s risk and its expected rate of return |
| 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 an asset for more than you paid. A capital loss occurs when you sell for less than you paid. In Canada, capital gains are taxed at half the rate of regular income, and they can be offset with capital losses |
| Capital markets | The venues under which companies can raise capital through issuing and dealing in shares, bonds, and other long-term financial instruments. |
| Cash flow | The money that moves into and out of a business, generally over a stated period of a month or a year. |
| Consumer price index (CPI) | Measures changes in the price of a basket of consumer goods and services that are considered commonly purchased by households. |
| Convertible bonds | A bond isued by a company that can be converted in a speficied number of that company's common shares or cash |
| Credit | Providing money or resources to another party without the expectation of immediate reimburesement. |
| Credit default swaps (CDS) | A type of insurance purchased by the buyer of corporate or sovereign debt to protect against any possible loss if the issuer were to default on that debt |
| Debenture | A type of bond issued by a company that is not backed by any specific asset |
| Debt default | A debt default happens when a borrower fails to pay his or her loan at the time it is due. The time a default happens varies, depending on the terms agreed upon by the creditor and the borrower. |
| Depreciation | The reduction in the value of an asset over time. Also the decrease in the value of a currency against other currencies |
| Derivatives | A financial instrument (such as a future, option, or warrant) whose value is dependent on the value of an underlying asset, which can be an index, a warrant, an option or other entity. |
| Distribution yield | Distribution yield is a way of measuring annual income as a percentage of the unit price. |
| Diversification | The practice of mixing a wide variety of investments and/or asset classes in a portfolio as a way to potentially reduce the risk of the portfolio |
| 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 yield | The percentage a company pays out in dividends each year relative to its share price |
| Dollar-cost averaging | 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 |
| Duration | Duration is the number of years required to recover the true cost of a bond from its purchase date and is a means to measure how sensitive the bond is to a change in interest rates. |
| Earnings per share (EPS) | A company’s net income divided by the number of shares outstanding. |
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Effective duration |
Effective duration is a method to measure the duration of bonds that have embedded options and takes into account that expected cash flows will fluctuate as interest rates change. |
| Emerging markets | Countries whose economies are considered less developed, such as Brazil, Russia, India and China (BRIC) |
| Equities | Equities are investments in stocks of companies or organizations. Equities generally offer greater return potential than guaranteed or fixed income investments, however this is often accompanied by higher potential volatility. |
| ESG | Environmental, Social and Governance - Three factors used to measure the environmental and ethical behavior of a corporation or investment. |
| Exchange-Traded fund (ETF) | An investment fund that holds a basket of stocks, bonds or other securities and tracks the performance of an index, a commodity, or a basket of assets. Traditional ETFs are index funds, which offer a low-cost way of building a diversified portfolio without selecting individual stocks or bonds. ETFs trade like a common stock on a stock exchange and their price can fluctuate throughout a trading session. |
| Face value | The nominal value or dollar value of a security. For stocks, it is the price shown on the certificate; for bonds, it is the amount paid to the holder at maturity. This is also known as par value or "par". |
| Fair market value | The price an asset is worth in the marketplace |
| Federal Reserve (Fed) | The Federal Reserve System is the central bank of the United States. It performs general functions to promote the effective operation of the U.S. economy and, more generally, the public interest. |
| Fiscal year | The period a company or government uses for accounting purposes and financial statements. It does not have to be the same as a calendar year. |
| Fixed income | A type of investment which provides regular income over a certain period and at fairly predictable levels. |
| Futures | A financial contract that obligates the buyer to purchase an asset or the seller to sell an asset, on a determined date and at a set price. |
| Gross Domestic Product (GDP) | The dollar value of all goods and services produced in a country |
| 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 normally have up to a certain principal guaranteed by the federal or provincial government |
| Index | A statistical tool that measures the performance of a security market or economy, based on the performance of a group of securities that represent a particular portion of that market or economy. Each index has its own calculation methods, usually expressed as a percentage change from the base value. |
| Initial public offering (IPO) | The first sale issuance of a company's stock to the public, frequently to institutional investors. |
| Institutional investor | A company or organization, such as a bank, pension fund, labor union, or insurance company, that makes substantial investments. |
| Interest rate | The percentage of the principal sum that the lender charges the borrower for the use of the money lent, deposited or borrowed. It is usually charged annually. |
| Large-cap stock | A security issued by a company with a market capitalization above $10 billion |
| Leverage | Using borrowed money to increase the potential return of an investment |
| Liabilities | A debt or financial obligation. Companies report liabilities, such as accounts payable, on their balance sheets. |
| LIBOR | LIBOR is a benchmark rate that some of the world's leading banks charge each other for short-term loans. It stands for Intercontinental Exchange London Interbank Offered Rate and serves as the first step to calculating interest rates on various loans throughout the world. |
| Long | Buying a financial security with the expectation that it will rise in value |
| Management expense ratio (MER) | The MER is the main cost of investing in a mutual fund (expressed as an annualized percentage of daily average net asset value) and includes management fees, operating expenses and taxes, as well as any trailing commission. |
| Market capitalization (market cap) | The total market value of a company's outstanding shares. |
| Market timing | Buying or selling financial securities by attempting to predict future price movements |
| Market value | The value at a particular date, assuming the investment is being sold. |
| Money market | Short-term debt securities maturing in one year or less. Generally less risky than other market-related funds. |
| Momentum investing | Buying securities that have had high returns over the past three to 12 months |
| Mortgage prepayment strategy | Investments in mortgage derivatives used to isolate the prepayment component of mortgages. |
| Municipal bond | A security issued by or on behalf of a local government or authority |
| Multi-asset | A combination of asset classes (such as cash, equity or bonds). A multi-asset investment contains more than one asset class, thus creating a group or portfolio of assets. |
| Mutual fund | An investment vehicle that holds a mix of stocks, bonds, money market instruments or other assets. |
| Net asset value (NAV) | The value of a mutual fund that is reached by deducting the fund's liabilities from the market value of all of its shares and then dividing by the number of issued shares. |
| Outperform | When an investment is expected to perform better than a specified index or the overall market, usually over a noted period of time. |
| Overweighting | Investing in a market sector, industry or specific security to a great degree than normal, generally defined by that sector, industry or security's weighting in the benchmark. |
| Positioning strategy | Positioning strategies are customized portfolios directly managed by Russell Investments for use within the total portfolio. Portfolio managers use positioning strategies to seek excess return and manage portfolio risks by targeting specific exposures. These strategies are used in conjunction with allocations to third-party active managers to fully reflect strategic and dynamic insights with integrated liquidity and risk management. |
| Portfolio | A combination of financial assets held by an investor, either an individual or a company or institution. |
| Preferred share | A class of ownership in a corporation that has a higher claim on assets and earnings than common shares. |
| Price-to-book ratio | A ratio that compares a company's current share price to its book value per share |
| Price-to-earnings ratio | A ratio that compares a company's current share price to its earnings per per share. |
| Prime rate | The interest rate at which money may be borrowed commercially and is influenced by countries' central banks. |
| Profit | The act of selling a security that has gone up in price in order to capture the gains |
| Prospectus | A legal document filed with a securities commission that provides details about investments sold to the public |
| Put option | A contract that gives you the right, but not the obligation, to sell a stock at a specified price within a certain time frame |
| Return of capital | When an investor receives a portion of the original investment back. This payment is not taxed as income, but it reduces the "adjusted cost base" (ACB) of the investment. When the ACB gets to zero, any subsequent return is taxable as a capital gain. |
| Schiller’s Cyclically-adjusted price to earnings ratio (CAPE) | Valuation measure for equity markets. It is measures the price of the index relative to average inflation adjusted earnings over previous 10 years. |
| Security | A tradable financial instrument such as a stock, bond or option |
| Short covering | When an investor buys back borrowed securities in order to avoid a loss when the price of that security moves higher. |
| Short selling | The sale of a security by someone who has borrowed that security in the belief that the price will fall and can therefore be bought back later at a lower price, making a profit |
| Small-cap stock | Securities from companies with a total market capitalization between $300 million and $2 billion |
| Spot price | The current market price at which an asset is bought or sold for immediate payment and delivery |
| Standard deviation | Standard deviation measures how much the value of a fund rises and falls during a given period in relation to the fund’s average value. A low standard deviation means that the value of the fund has fluctuated less. |
| Stock split | When a company increases the number of outstanding shares by issuing more shares to current shareholders at a specific ratio, such as two for one. At that ratio, each existing shareholder would receive one additional share for each share held, while the share price would be adjusted lower and therefore the market value is unaffected. |
| Strike price | The price at which a put or call option can be exercised. |
| Ticker | The abbreviation or stock symbol used to identify a corporation on a stock exchange |
| Tracking error | Tracking error measures the variation between the return (or price) of a portfolio or fund and its associated benchmark |
| Underperform | In general, this means to do worse than the performance of a particular benchmark. Mutual Fund XYZ is said to underperform the S&P500 Index if its return falls short of the S&P500 Index return. However, this language does not take risk into account. That is, one might have a lower return than the benchmark in a particular year because of lower risk exposure. Underperform is also a term used by analysts to describe the prospects of a particular company. Usually, this means that the company will do worse than its industry average |
| Value stocks | Companies that appear to be underpriced based on a number of fundmental factors, such as low price-to-earnings and price-to-book ratios or high dividend yield |
| Volatility strategy | A tail risk strategy using interest rate derivatives. |
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Weighted average market capitalization |
The weighted average market capitalization of an equity portfolio gives you a measure of the size of the companies in which the fund invests. |
| Yield | The income generated by a stock or bond. A stock’s yield is its annual cash dividends divided by its current price. A bond's yield is the amount of return an investor realizes on a bond. |
| Yield curve | Yield curve refers to short and long term government interest rates plotted on a graph. It usually curves up as long-term rates are generally higher than short-term rates. When short-term rates are higher than long-term rate, the yield curve inverts, which is often viewed as the precursor to a recession. |
| Zero coupon bond | A bond that is issued at a deep discount to its face value but pays no interest. |
Sources for defiinitions: Investopedia, Wikipedia, Oxford English Dictionary, Merriam-Webster dictionary, MoneySense magazine