The Investor’s Glossary

Saving money is an extremely important habit, but it isn’t the end of the road when it comes to personal finance. Money that sits in a savings account for a long period of time loses value due to inflation. This is a phenomenon that affects everyone, and there’s nothing the average person can do to stop it or slow it down. Even if you earn interest on your savings, the amount you keep will be worth less than the amount your money will depreciate in value over the same period.

This is where investing comes in. Investing your money in stocks, bonds, businesses, property and more is the only way to truly grow your wealth. This is because the growth created by a good investment will outweigh the loss of value that your dollars will experience over time due to inflation. Beyond that, a well-curated investment portfolio can help you reach long-term goals, like your retirement or a child’s education, much faster than you’d otherwise be able to alone.

Before you rush to invest all your spare cash, it should be clearly stated that investing always involves some sort of risk. Though your money will inevitably lose value over the years in your savings account, there isn’t a chance you’re going to lose it all in a flash when you hold it there. Your investments, on the other hand, could completely tank on you if the economy flounders. So, even if you earn a high amount of income, you should focus on saving before you turn to investing if you don’t have a solid emergency fund built up. Always keep in mind that you need to be able to protect yourself in the event you experience a worst-case scenario with your investments.

With that said, it’s time explore the world of investing! It’s a large and sometimes complicated one, and you might have already realized that it comes with it’s own vocabulary. For a beginner, that means that listening to others speak about investing or trying to read up about it can be confusing at times. That feeling can be discouraging to many, and make them feel like they aren’t welcome to join the party. It’s estimated that around 49% of Canadians consider themselves to be “aspiring investors” but avoid actually doing so because they feel they don’t know enough about it. Beyond that figure, investor confidence is even more fractured among gender lines. In a 2019 survey by Mylo, only 8% of Canadian women agreed that they would consider themselves to be an expert when it comes to investing, whereas 25% of men felt comfortable considering themselves as such.

The reality is, if you want to get into investing and do it properly, you’ve got a lot to learn. There’s a great deal to gain by growing your investment portfolio, but there’s also an equivalent amount to lose (if not more) by blindly investing without fully understanding what you’re doing. A great place to start is by learning some of the key terms or phrases you’ll run into on a regular basis and break them down a bit. By taking the time to learn the language of investing, you’ll soon realize that you feel more confident you deserve a seat at the table!

Here’s your basic Investor’s Glossary:

Bear market: An extended period of declining stock prices, usually marked by a decline of 20% or more. This kind of decline is often triggered by widespread pessimism, growing unemployment or economic recession. This is the opposite of a bull market.

Bond: An agreement between two parties that acts like a loan or an IOU for repayment. Bonds can be issued by corporations, municipalities or the Canadian government. The bond’s issuer promises the investor to repay the full amount of the loan on a specific date and pay a specified rate of return for the use of the money to the investor at specific time intervals.

Blue chip stock: To have a blue chip stock, a company must be a leader in market capitalization within its sector, its country and in its business segment. The company will often have products or services that make them well-known, household names. In general, these companies pay out consistent dividends that make them attractive investments to those that can afford them. Some examples of Canadian blue chip stocks are Royal Bank of Canada (RBC), Sun Life Financial (SLF) or Loblaw (L).

Bull market: Any market in which prices are advancing in an upward trend. In general, someone is known as “bullish” if they believe the value of a security or a market will rise. You may recognize this concept embodied by the famous bull statue that rests outside the New York Stock Exchange!

Capital gain/loss: The difference between the price you receive when you sell an asset and its adjusted cost base, which is the amount an asset is worth after improvements have been made that would increase its value since you purchased it. So, for example, if you buy a home and renovate it, you increase its value greatly through your improvements. That increase in value would raise the selling price of the home if you choose to sell it, and likely mean that you’ll make a profit when you do. This same increase in value occurs when a business grows, increasing the value of its stock.

When you sell a stock and you lose money on it, that’s called a capital loss. When you sell a stock and you earn a profit, that’s called a capital gain. All capital gains you make are taxed at half the rate of your regular income tax in Canada, but that amount can be offset by capital losses.

Capital: The funds invested in a company on a long-term basis and obtained by issuing preferred or common stock, by retaining a portion of the company's earnings from date of incorporation and by long-term borrowing.

Common share: a security that represents part ownership of a company. Common shareholders can normally vote for the board of directors in a corporation and are entitled to approved dividends after bondholders and preferred shareholders.

Discount brokerage: A firm that allows you to buy and sell securities at a lower cost than a full-service brokerage would charge you, whether that’s done online or by the phone. Discount brokerages aren’t usually allowed give you any advice on your investments; they simply take your order and execute it. As such, while you may save on fees here, it probably doesn’t make a ton of sense to go with a discount brokerage if you’re just getting started with investing.

Dividend: A dividend is a portion of a company's profit paid to common and preferred shareholders. Preferred shareholders will receive dividends before common shareholders do. Dividends provide an incentive to own stock in stable companies even if they aren’t steadily growing, as the promise of an increase in share value is generally what drives people to select investments. However, companies are not required to pay dividends.

Diversification: The practice of investing in numerous different industries and businesses (essentially, not putting all your investment eggs in one basket). When diversifying investments, you’re trying to protect yourself in the event that some of your investments tank. You may lose some money on a failing investment, but ideally you’ll have another investment that grows dramatically so you don’t suffer in as dramatic a fashion as you would otherwise.

Dow Jones Industrial Average (Dow): The most commonly used indicator of stock market performance, based on the share prices of 30 actively traded, American blue chip stocks, which are primarily major industrial companies (you’ll often hear people referencing how the Dow is doing).

Earnings per share (EPS): A company’s net income divided by the number of shares outstanding. This figure it used to indicate how much money a company makes every time it sells one of its shares, which in turn tells investors what they can expect in terms of future stock performance. A company that’s seeing their earnings grow is one that promises high-level performance in the stock market.

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. Alternatively, the S&P 500 Index an index of the largest 500 publicly-traded companies in the United States based on their market capitalization, and is well-known for being one of the best gauges for determining the overall health of the 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. So, for example, if you held an S&P Composite Index Fund, you’d hold shares of all 260 stocks that make up the S&P Composite Index Fund and see results that essentially mimic that of the index.

Inflation: A rise in the prices of goods and services, often equated with loss of purchasing power. As the cost of living slowly increases over time, the amount of money a person needs to stay afloat increases too. For example, $20 in 1980 was considered to be a lot of money to most, whereas today in 2021, most people don’t even bat an eye when they spend $20.

Liquidity: The ability to have ready access to invested money. Cash is always the most liquid asset you can have, whereas something like property is not liquid at all (though you still own it and thus the amount of money it’s worth, you can’t sell a home and have that cash in full in a short period of time). Mutual funds are seen as a very liquid investment because their shares can be redeemed for their current value (which may be more or less than the original price paid by the investor) on any business day.

Market capitalization: A company’s stock price multiplied by the number of outstanding shares. This figure is very important in investing, as it determines the value of a company from the perspective of an investor. This number represents how much of a company’s equity is still available to be purchased and how much it’s worth, which reflects the future prospects of the business (a business that’s already been 99% invested in doesn’t have much to offer new investors on a long-term basis).

Mutual fund: A fund operated by an investment company that raises money from shareholders and invests it in stocks, bonds, options, commodities or money market securities. A mutual fund uses money from a number of different people to invest towards a larger goal that wouldn’t otherwise be possible with the funds of one investor alone.

Registered account: A bank account that’s registered with the Canadian government to hold special tax status that’s more favourable than a standard savings account. Three of the most common registered accounts are RRSP’s (registered retirement savings plan), TFSA’s (tax-free savings account) and RESP’s (registered education savings plan). The only real “downside” to these accounts are the government-mandated limits on how much you can save in each type of account each year, but they still provide create opportunities for most people.

If you’re looking for more info on TFSA’s, check out TFSA’s: Everything You Need to Know.

NASDAQ: NASDAQ stands for National Association of Securities Dealers Automated Quotations exchange. NASDAQ was the first exchange that allowed people to trade stocks on a computer system as opposed to having to sell on the trading room floor, as you’ve likely seen in any Wall Street-esque movie. However, when people refer to “the NASDAQ”, what they mean is the NASDAQ index. All the companies that trade on NASDAQ specifically are included in this index, most of which are large technology companies (though there are others, like biotech and industrial businesses).

Preferred share: A security that provides investors with a fixed dividend that must be paid before dividends are paid out to common shareholders. If a company is liquidated, preferred shareholders rank ahead of common shareholders but behind bondholders in terms of receiving a payout. Canadian preferred shareholders also receive favourable tax treatment in taxable accounts.

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. Because a put option guarantees the investor the right to sell at a certain, fixed price, a put option is very attractive in the event that a stock is losing money (as it guarantees the investor won’t lose their entire investment). However, conversely, a put option is less attractive when a stock is doing well the sale price of the asset is still fixed.

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

Security: A tradable financial instrument such as a stock, bond or option. You can essentially think of a security broadly as a kind of currency in investments.

Short selling: A technique where 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. If you’ve been following the Game Stop saga, the act of short selling was why Redditors went after Wall Street hedge fund managers and were able to squeeze them so much. You also may have seen it mentioned quite a bit in The Wolf of Wall Street.

Share: A unit of ownership in an investment, such as a share of a stock. In a corporation, those who own the largest number of shares are the ones with the most decision-making power.

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

Did we miss something you wanted to see here? Let us know and we’ll add it to the glossary!

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