Glossary

Glossary

Definitions

ADR - American Depository Receipt. A certificate trading on the NYSE representing a certain number of shares in a non-U.S. company.

All-or-None - An order for stock purchase that requires the broker to buy either all of the required shares or not complete the order. An AON order requires special processing and might not be executed unless the stock trades at exactly the target price.

Amex - American Stock Exchange. Most US ETFs trade on the Amex.

Annuity - A contract purchased from a life-insurance company in which a lump sum is exchanged for an income stream.

Asset Allocation - the division of a portfolio between high-risk (equities) and low-risk (bond and cash) components. This division is the main controller of risk and is the most important decision the investor makes.

Black-Scholes Equation - A complex and sophisticated equation used to determine option prices.

Bond - A security representing a debt obligation from a government or company. The debt is expected to be repaid in full at the bond maturity date.

Bond Ladder - A series of bonds with increasing maturities, often spaced one year apart.

Capped Index - A stock index which is constrained so that individual components can not exceed a certain percentage. For the "capped" S&P/TSX 60, no component can exceed a 10% weighting.

CRA - Canada Revenue Agency. The friendly income tax people.

Clone fund - A mutual fund tracking non-Canadian securities that uses financial derivatives to bypass foreign content limits in an RRSP, RRIF, or LRSP.

Contrarian - An investor who buys when most people are selling and sells when most people are buying. In practice, this is very difficult to do, partly for psychological reasons, but if done successfully can improve returns. Systematic rebalancing can be used to enforce contrarian behaviour.

COPRs - Canadian Originated Preferred Securities. Securities that trade on the TSX and provide interest income not eligible for the dividend tax credit. Some COPRs also trade on the NYSE.

Correlation - The tendency of individual securities to move together. A correlation coefficient of +1 means that two securities will always move up and down together. A correlation coefficient of -1 means that one security moves down when another moves up. A correlation coefficient of zero means that the movement of the two securities shows no pattern.

Coupon Bond - A bond that yields a certain amount (the "coupon"), usually paid semi-annually. Coupon bonds provide cash flow at predictable intervals and a capital repayment of the face value at maturity, unless the issuer defaults.

CPI - Consumer Price Index.

Diversification - The utilization of a wide variety of uncorrelated or weakly-correlated securities to fulfill portfolio asset allocation. Effective diversification will reduce risk.

Dividend Tax Credit - Tax procedure for reducing the effective tax rate on dividends from Canadian companies.

DIY - Do-it-yourself (investor).

Dow Jones Index - Usually refers to the Dow Jones Industrial Index (DJIA) of thirty large U.S. stocks.

Duration - The sensitivity of a bond (or a bond fund) to interest rate changes. A bond with a duration of five years will go down in price by 5% if interest rates increase by 1%.

EAFE - Europe - Australasia - Far East Index.

EMH - Efficient Market Hypothesis (also referred to as EMT, or Efficient Market Theory); a model of securities pricing that suggests that current information is included in the current price, and that the fair price for a security is therefore whatever it is currently trading at. There are three forms of EMH that differ in what types of information are included.

Equity - A security representing partial ownership in a company. Stocks are equities.

ETF - Exchange-Traded Fund. A basket of stocks that is bought and sold on a stock exchange as if it were a single stock.

Face Value - The nominal value of a security, e.g. $100 for a bond.

Fama-French Three Factor Model - Academic study indicating that above-market returns could be obtained by including value and small-capitalization stocks in a portfolio.

FPX Indexes - Three portfolio indexes published in the Financial Post (part of the National Post). The FPX Income, FPX Balanced, and FPX Growth Indexes are appropriate benchmarks for conservative, neutral, or aggressive investors, respectively.

GIC - Guaranteed Investment Certificate. A debt security issued by a financial institution for a certain term and interest rate, providing a guaranteed return to the investor but usually with limited flexibility to access funds before maturity.

GIC Ladder - A series of GICs with increasing maturities, usually spaced one year apart.

Gordon Equation - An equation that states that total return is equal to dividend rate plus dividend growth rate (if there is no change in stock or market valuations).

Growth Stock - A stock representing a company which has had a history of increasing its revenues more quickly than other companies. A selection of growth stocks can be used to form a Growth ETF. Growth stocks are often expensive. See "Value Stock". Growth stocks have historically given generally lower rates of return than have value stocks.

High-Yield Bonds - Junk Bonds.

Index Fund - A mutual fund that tracks a certain stock (or bond) index.

IPO - Initial Public Offering. When a formerly-private company becomes public, the stocks are offered to investors in an IPO.

Junk Bond - A bond with a low investment quality rating. Junk bonds are similar to equities in risk.

Large-Cap - Large Capitalization; i.e. big companies.

LRSP - Locked-In Retirement Savings Plan. Generally similar to an RRSP but using pension funds from a former employer. No further contributions or early withdrawals are allowed by law.

Marginal Tax Rate - The total tax payable on the last dollar of income. The overall tax rate, which measures the total tax payable as a percentage of total income, will be significantly lower.

Mean Reversion - The tendency of an investment class to alternate periods of above-average returns with periods of below-average returns.

MER - Management Expense Ratio. How much a mutual fund charges unitholders as a management fee. The MER represents only a portion of the costs associated with a mutual fund; the impact of taxes and the costs of buying and selling securities are not included.

Mid-Cap - Middle-sized companies.

MX - Montreal Exchange.

NASDAQ - National Association of Securities Dealers and Quotations. The exchange used for trading most "high-tech" stocks.

NAV - Net Asset Value. The underlying value of a mutual fund or ETF if the assets were to be sold separately.

NYSE - New York Stock Exchange.

OAT€i - Euro-denominated Real Return Bond offered by the Government of France.

Option - a security representing the right, but not the obligation, to buy or sell another security at a specified price before a certain date. Used by sophisticated investors to control risk. Additional definitions are given in the section on Options.

Preferred Share - A security that provides an income similar to that of a bond. Preferred shares of Canadian companies qualify for the dividend tax credit. Preferred shares are formally classed as "equities", but are similar in risk profile to corporate bonds and can be used as a substitute for bonds in a non-registered investment account. Additional definitions are given in the section on Preferred Shares.

Rebalancing - Returning a portfolio to its asset allocation targets by buying and/or selling securities. Rebalancing forces an investor to "buy low and sell high", and is contrarian in nature.

REIT - Real Estate Investment Trust. A security that provides unitholders with rental income from real estate properties.

Royalty Trust - a security that provides unitholders with income from royalties associated with the sale of oil and/or natural gas. A significant portion of the income represents return of the investor's own capital.

RRB - Real Return Bond. A bond that is indexed to the Canadian CPI, and thus which provides protection of income and capital from future inflation. It should be held in an RRSP, RRIF, or LRSP to avoid unfavourable tax treatment.

RRIF - Registered Retirement Income Fund.

RRSP - Registered Retirement Savings Plan.

Rule of 72 - Mathematical approximation that the time required to double an investment is about 72 divided by the percent annual return, e.g. 12 years for a 6% return.

Russell 1000 Index - An index representing the largest 1000 companies in the Russell 3000. Sometimes referred to as "R1K". Investment performance is almost identical to that of the S&P 500.

Russell 2000 Index - An index representing the smallest 2000 companies in the Russell 3000. Sometimes referred to as "R2K". Often used as a proxy for small U.S. companies.

Russell 3000 Index - An index representing 3000 of the largest companies in the U.S. Sometimes referred to as "R3K". Investment performance is very similar to that of the Wilshire 5000.

S&P 400 Index - Standard and Poor's 400; an index representing 400 medium-capitalization companies in the U.S.

S&P 500 Index - Standard and Poor's 500; an index representing 500 of the largest companies in the U.S.

S&P 600 Index - Standard and Poor's 600; an index representing 600 small-capitalization companies in the U.S.

S&P/TSX 60 Index - Index representing sixty of the largest companies trading on the Toronto Stock Exchange.

S&P/TSX Composite Index - Index representing the total Toronto stock market.

Slice and Dice - Dividing a stock market investment amongst several ETFs, each with differing ranges of company size and company fundamentals.

Small-Cap - Small companies.

Standard Deviation - A mathematical measurement that shows how much a security varies in price. It is used as a mathematical proxy for risk.

Stripped Bond - A bond which is purchased at a discount to face value. No payments are made until maturity, when the face value is returned to the purchaser. Stripped bonds should only be held in an RRSP, RRIF, or LRSP.

Style ETF - An ETF that favours either value or growth stocks.

Systematic Risk - The risk associated with a particular market. It can not be reduced by adding more securities from the same market.

Systematic Withdrawal Plan (SWP) - A plan offered by a mutual fund company under which a fixed dollar amount of a mutual fund is redeemed at regular intervals. An SWP can drain a portfolio rapidly.

T-Bills - Also called Treasury Bills. Short-term (thirty days to one year) debt issued by the Government of Canada, issued at a discount to face value.

TIPS - Inflation-indexed bonds offered by the U.S. government. They should be held in an RRSP, RRIF, or LRSP to avoid unfavourable tax treatment.

TSX - Toronto Stock Exchange.

Unsystematic Risk - The extra risk above the systematic risk (see above) that is associated with holding a particular security. Unsystematic risk can be reduced by holding a larger number of securities in that market.

Value Stock - A stock representing a company that is felt to be inexpensively priced, sometimes because of underlying problems or limited growth prospects. A selection of value stocks can be used to form a Value ETF. See "Growth Stock". Historically, value stocks give a higher rate of return than do growth stocks.

Variance - The square of the standard deviation.

Volatility - How much a security varies in price. Usually measured by standard deviation.

Wilshire 4500 Index - Extended-Market Index representing the Wilshire 5000 less the S&P 500 stocks. Investors who already hold the S&P 500 can use the Wilshire 4500 to broaden their holdings with smaller stocks.

Wilshire 5000 Index - Index representing the U.S. total stock market. Sometimes referred to as "W5K".

Stock Exchange Symbols for Some ETFs

AGG - Amex-traded Barclays Global Investor ETF tracking the Lehman Aggregate Bond Index, which provides investors with exposure to the Treasury, investment grade corporate and mortgage sectors of the US taxable bond market.

EEM - Amex-traded Barclays Global Investor ETF tracking the MSCI Emerging Markets Free (EMF) Index.

EFA - Amex-traded Barclays Global Investor ETF tracking the MSCI EAFE Index.

EFG - NYSE-traded Barclays Global Investor ETF tracking the MSCI EAFE Growth Index.

EFV - NYSE-traded Barclays Global Investor ETF tracking the MSCI EAFE Value Index.

GLD - NYSE-traded Street Tracks ETF representing 1/10 of an ounce of gold.

IAU - Amex-traded Barclays ETF tracking the price of gold. IAU also trades on the TSX as IGT.

IGT - Toronto Stock Exchange symbol for IAU.

IJJ - Amex-traded Barclays ETF tracking the "value" portion of the "mid-cap" S&P 400 Index.

IJR - Amex-traded Barclays ETF tracking the "small-cap" S&P 600 Index.

IVE - Amex-traded Barclays ETF tracking the "value" portion of the "large-cap" S&P 500 Index.

IVV - Amex-traded Barclays ETF tracking the "large-cap" S&P 500 Index.

IWB - Amex-traded Barclays ETF tracking the "large-cap" Russell 1000 Index.

IWN - Amex-traded Barclays ETF tracking the "value" portion of the "small-cap" Russell 2000 Index.

LQD - Amex-traded Barclays ETF tracking the Goldman Sachs corporate bond index.

SPY - Amex-traded ETF tracking the "large-cap" S&P 500 Index.

TIP - NYSE-traded Barclays ETF tracking the Lehman Treasury Inflation Notes Index.

VGK - Amex-traded Vanguard ETF tracking the MSCI Europe Index.

VNQ - Amex-traded Vanguard ETF tracking the Morgan Stanley REIT Index.

VPL - Amex-traded Vanguard ETF tracking the MSCI Pacific Index.

VTI - Amex-traded Vanguard ETF tracking the Wilshire 5000 Total Market Index.

VWO - Amex-traded Vanguard ETF tracking the Select Emerging Markets Index.

VXF - Amex-traded Vanguard ETF tracking the Wilshire 4500 Extended Market Index.

XBB - TSX-traded Barclays Canadian ETF based on Scotia Capital Universe Bond Index.

XDV - TSX-traded Barclays ETF tracking the Dow Jones Canada Select Dividend Index.

XIC - TSX-traded Barclays Canadian ETF based on the S&P/TSX Capped Composite (see Capped Index).

XIN - TSX-traded Barclays Canadian ETF tracking the currency-hedged EAFE Index.

XIU - TSX-traded Barclays Canadian S&P/TSX 60 ETF.

XFN - TSX-traded Barclays Canadian financial services sector ETF.

XGD - TSX-traded Barclays Canadian gold sector ETF.

XMD - TSX-traded Barclays Canadian ETF based on middle-sized and small companies.

XRE - TSX-traded Barclays Canadian ETF based on the S&P/TSX REIT Index.

XRB - TSX-traded Barclays Canadian ETF based on the Scotia Capital Real Return Bond Index.

XSB - TSX-traded Barclays Canadian ETF based on the Scotia Capital Short Term Bond Index.

XSP - TSX-traded Barclays Canadian ETF tracking the currency-hedged S&P 500 Index.