Want to learn about investing? Here is a continuation of the mini-glossary of investment terminologies you will come across frequently on your investing journey.
Management Expense Ratio (MER)
The MER is a combination of fees charged for managing and administering a mutual fund or ETF. The MER includes a management fee (fees paid to the fund manager) and operating fees (fees for administration staff, audit, legal, stationery and prospectus printing).
It is a trading account that allows an investor to use borrowed money to purchase investment assets.
This refers to the stock market value of a company. It is calculated by multiplying the total number of outstanding shares by its current market price per share.
Market capitalization is an indication of the size of a company in relation to its peers. Companies may generally be categorized as – Large-cap, Medium-cap, and Small-cap.
It is an investing strategy that attempts to predict market outcomes using fundamental and technical analyses. For example, predicting that a stock would increase in price in the near future and buying at a “low” price in readiness for the rise in prices. When the price of the stock goes up, the investor may sell it to capture profit (profit-taking), move to cash, and stay on the sidelines till they see another “signal” to buy or sell. Essentially, investors using this strategy want to buy low and sell high.
Timing the market negates the benefits of long-term investing and often plays into our emotional weaknesses and behavioural biases. Investors become prone to chasing trends, fall for loss aversion, confirmation, hindsight and other biases that lead them to take unreasonable risks. Frequent trading may also increase transaction costs.
Further reading: Behavioural Biases Killing Your Investing Success
A trade order put in by an investor requesting the purchase or sale of a security (stock) at the current market price.
This is a fund that pools money from several investors in order to purchase multiple securities that are actively managed by a fund manager. Mutual funds typically charge higher fees (MER) than index funds or ETFs.
Further Reading: Mutual Funds and Their Place in Your Portfolio
Nasdaq Composite (IXIC)
It is a stock index of thousands of companies, a majority of which are technology companies. The Nasdaq composite uses a market value weighting.
Non-Registered Investment Account
It is an investment account that does not provide a tax-shelter to your investment returns.
Price-To-Earnings Ratio (P/E)
Is a ratio used to value a company’s stock and whether it is overvalued or undervalued. It is calculated by dividing the current share price by the earnings per share (EPS).
P/E ratio = current share price/EPS
Using the P/E ratio, investors can assess a stock and decide how much they are willing to pay for it based on its current earnings. The P/E ratio is also referred to as a “price multiple.” When assessing stocks, the P/E ratio should not be used as a standalone but should be considered in the light of other financial metrics before you decide on buying/selling a stock.
Over The Counter (OTC)
It is a decentralized market made up of dealers who connect with each other using telephone and computer networks. Financial assets not listed on an exchange are often traded through the OTC market, including many debt instruments and derivatives.
Assets purchased through the OTC market may carry more risks due to illiquidity and a lack of transparency.
Is the interest rate at which banks lend to their most creditworthy clients. Banks normally set their prime rate based on the lending rate set by the bank of Canada. The prime rate is also used by financial institutions to determine the interest rates they charge on variable loans, mortgages, and lines of credit.
A collection of the different securities/investments owned by an individual investor or institution. A portfolio may consist of a mix of assets such as bonds, stocks, mutual funds, ETFs, cash and cash equivalents.
It is a document provided by a company or fund which discloses relevant information about a security so that investors are informed about what they are investing in.
For example, a prospectus produced by an investment firm may list all the mutual funds they offer, investment objectives and strategy of the fund, fund managers, management fees and other fund costs, tax considerations, risks associated with investing in the fund, rules to follow when purchasing, switching or redeeming funds, minimum investments, and some legal jargon.
Refers to when you sell an investment that has appreciated in price in order to convert your “paper” profit into cash.
Registered Education Savings Plan (RESP)
This is a registered account in Canada that enables parents to save for their children’s post-secondary education. The Canadian government provides a grant of 20 cents per 1$ you contribute, up to a maximum grant of $500 per year. Earnings on the account are sheltered from taxes until your child starts to withdraw funds for college, at which time they pay any taxes due (at a much lower tax rate).
Further Reading: RESP Grants – CESG, aCESG, and CLB
Registered Retirement Savings Plan (RRSP)
This is a retirement savings plan in Canada that enables you to save for retirement in an account that is not taxed until you start making withdrawals. The government sets an annual contribution amount that is a percentage of your income for the previous year, up to a maximum.
For 2018, the contribution amount is 18% of your earned income in 2017 or $26,230, whichever is less. Your contribution amount is also tax-deductible.
Registered Investment Account
It is an investment account that allows you to save or invest tax-free until you withdraw your funds. Examples include the RRSP, RRIF, and RESP accounts.
The Tax-Free Savings account (TFSA) is also a registered investment, however, no taxes are levied on your returns even when you withdraw funds.
This is the probability of loss or the possibility that expected returns (profit) on an investment may not be realized.
An investment signifying a stake or ownership rights through shares (stocks) or debt (bonds) or other investment products that have value and which can be transferred or sold to another investor.
It is a trading strategy that involves an investor selling a stock (security) they don’t own with the aim of making a profit when the price of the stock (security) falls. If the stock’s price declines, the investor buys it back at the lower price, returns the borrowed stock to the broker, and makes a tidy profit.
S&P/Toronto Stock Exchange Composite (S&P/TSX)
This is the main stock market index in Canada which currently tracks about 250 companies. It uses a market-capitalization weighting similar to the S&P 500.
Standard and Poor’s (S&P) 500 – $SPX
It is a stock index of 500 of the largest publicly traded companies in the United States. The S&P 500 uses market capitalization for weighting companies tracked by the index. The S&P 500 is widely regarded as a representation of the broad U.S. stock market.
Is the forecasting of the future price movement of a security based on analyzing its past price history. Investors who use technical analysis believe they can predict the future price behaviour of a security (stock) based on what they can read from its historical price patterns.
Technical analysis stands in contrast to the Random Walk Hypothesis, which posits that investors cannot predict stock prices.
Tax-Free Savings Account (TFSA)
This is a registered investment/savings account established in Canada in 2009. It allows Canadians to contribute money into a savings or investment account that is free from taxation. Any withdrawals or income earned (interest, dividends, capital gains) on the account are tax-free for life.
Every year, the federal government sets a contribution limit – $5,500 for 2018. Unused contribution room can be carried forward indefinitely to be used in future years.
Further Reading: 5 Ways To Invest in Your TFSA
Is the rate at which the price of a security changes and moves up and down. Volatility is a measure of risk.
A stock whose price tends to move rapidly during a short period of time is said to exhibit high volatility. When the price barely moves or is stable, it is said to have low volatility. Volatility is often symbolized in finance as sigma σ – also referred to as standard deviation.
It is a measure of your return on an investment and is calculated as a percentage. For example, for a stock, the yield is calculated using: Annual Dividends/Current Stock Price.
Continue Reading: Basic Investment Terms Every Investor Should Know (Part 1)
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