Glossary of Important Stuff
Bond – a fixed income financial instrument that may be purchased from a company, or government, that provides steady income at a pre-determined rate of return.
Capital – AKA principal, capital is the initial investment, or money that you save or invest.
Compound Interest – the concept that money earned with interest is added to the bottom line, increasing, or compounding the effect of interest over time.
Inflation – the incessant climb of the cost of living, and the continual erosion of every dollar’s buying power, due to the effects of Demand-Pull (higher demand drives up prices) and Cost-Push (higher costs of doing business are passed on to the consumer).
Dividend – a share of earnings paid by a company that is treated differently with regards to taxation; one may receive dividends from shares owned, or as chosen form of income from one’s own small business.
Dividend Re-Investment Plan (DRIP) – a financial tool for re-investing dividends paid to a shareholder back into the company.
Diversification – increasing variability in the types of industries or sectors represented within one’s portfolio to reduce the impact of a single sector’s, or single company’s poor performance.
Exchange Traded Fund (ETF) – a financial instrument managed by an investment company that pools the capital of investors to purchase equity in many companies in order to deliver diversification, reduce volatility, and generate returns at the aggregate of the chosen market.
Guaranteed Investment Certificate (GIC) – a financial instrument that generates a set rate of return annually, over a defined investment period, and guarantees the return of capital in addition to the interest.
Investment Horizon – measured in years, the period of time between now and when one will need the money one has invested.
Management Expense Ratio (MER) – a key figure in the analysis of ETFs and Mutual funds, expressed as a percentage percentage, it is the cost of managing the fund (trading fees, salary of employees, overhead) divided by the value of total cash managed. The MER is typically less for ETFs and more for Mutual Funds.
Mutual Fund – a financial instrument managed by an investment company that pools the capital of investors to purchase equity in companies, hoping to deliver diversification and returns greater than that of the market in which it invests (due to expert analysis and investment).
Principal – the amount of money contributed by the investor, to their portfolio.
Rate of Return (ROR) – reported in percentage, the gain or loss on an investment over a specified period of time. Can be useful as a measure of a specific equity’s performance, a fund’s performance, or one’s overall portfolio’s performance.
Registered Retirement Savings Plan (RRSP) – a retirement savings vehicle that is protected by tax treaty, and allows one to defer taxes paid on income until retirement. The annual contribution is limited by annual salary.
Risk – the chance that an investment’s actual return will be less than the expected return, and may actually be total loss of original investment.
Risk Tolerance – Risk tolerance is an important factor for one to understand about oneself before starting to invest. Questionnaires are available on the web, here, and here.
S&P 500 Index – Standard & Poor’s index of the top 500 companies traded on the NYSE and the Nasdaq.
S&P/TSX Composite – Standard & Poor’s index of the largest companies by market capitalization on the Toronto Stock Exchange, representing 70% of the market value of companies traded on the TSX.
Tax-Free Savings Account (TFSA) – a savings vehicle that allows one to grow investments tax-free, as money withdrawn from a TFSA is not taxable. The annual contribution is limited by the Canada Revenue Agency.
Volatility – a measure of the variability in returns on an investment, fund, or portfolio, from day-to-day or year-to-year, where higher volatility means a higher standard deviation to returns. Volatility is distinct from risk (as above), although it is related to the risk of uncertainty in the size of changes of an investments value.
Yield – expressed as a percentage, the income return on an investment, compared to its cost to the investor.
Glossary of Bonus Stuff
NB: These terms are not offered in alphabetical order, as you often must understand the prior term to grasp the next. You may find these terms useful in evaluating the performance of individual companies, with the majority of these terms being reported on typical free financial websites (like Google Finance, or Globe Investor). Don’t worry, I still barely understand them. Hence, bonus shit.
Adjusted Cost Basis (ACB) – the cost of every investment purchased, as an average; the ACB may go up if a share is purchased twice (or more), first at a lower price, and then at a higher price. Most investors use a spreadsheet to keep track of this, as it becomes important for declaration of Capital Gains or Losses at tax time.
Capital Gains – when an investor sells an equity, ETF, or mutual fund, any money that is gained is a realized gain, is considered income, and is therefore eligible for taxation (unless it is within a TFSA or RRSP). One may also claim a capital loss for selling at a loss. Additionally, due to the constant buying and selling of equity within ETFs and mutual funds, investors in these funds may be subject to capital gains on these actions.
Price/Earnings (PE) Ratio – the price of a company’s share divided by its declared earnings; gives an approximation of how much an investor is willing to pay every dollar earned by the company, and can be useful in identifying overvalued or undervalued companies within an industry.
Forward Price/Earnings (Forward PE) Ratio – the price of a company’s share today, divided by its expected earnings; gives an approximation of earnings growth, as a falling Forward PE suggests an increase in earnings.
Price/Earnings to Growth (PEG) Ratio – the price of a company’s share divided by its declared earnings, and divided by the growth rate of its earnings over a set period of time; can give a clearer picture of a company’s health than the PE ratio. A PEG ratio of less than 1 is, as a rule of thumb, desirable, though it varies from industry to industry.
Price/Book Ratio – the price of a company’s share divided by its book value, otherwise known as its total assets less its intangible assets and liabilities; it gives an approximation of a company’s value relative to its worth.
Operating Margin – expressed as a percentage, the operating margin is the operating income (the amount of money generated by operations, less cost of operations), divided by the net sales; it gives an approximation of a company’s efficiency at turning sales into bottom line profit. A higher operating margin indicates a company that is better at turning every dollar earned in sales, into profit.
Market Capitalization – an expression of the size of a company in dollar terms; calculated by multiplying the number of outstanding shares by its share price.
Dividend Yield – expressed as a percentage, the annual yield of dividend income only on each share; calculated by dividing the annual dividend per share by the share price.
Dividend-Ex Date – the last day a person must own a share in order to be eligible for the company’s announced dividend. To receive the dividend, you must purchase the share the day before the ex-dividend date to be eligible as trades are finished at end of day.
Dividend Pay Date – the day on which dividends are disbursed.
Beta – a numerical quantification of a stock’s volatility, in comparison to the market, where a value of 1.0 suggests the stock’s price typically moves with the market (price rising as the market rises, and falling as the market falls); a high beta indicates higher volatility (e.g.: most tech stocks), while a low beta indicates lower volatility (e.g.: most utilities).
Debt-to-Equity Ratio (D/E Ratio) – a measure of a company’s leverage (operations financed using debt), and is calculated by dividing the amount of total liabilities (or debt) by total equity (or assets); a high D/E ratio indicates that a company is financing much of its operations with borrowed money, which may be helpful for growth, but is not a good business model in the long term.
Penny Stocks – a stock worth less than $1, is typically more risky and more volatile, as numerically small fluctuations in price can lead to large percentage changes in holding value.
Initial Public Offering – a private company chooses to go public, important people decide how much the company is worth, and investors buy shares.
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