Definitions¹

Accrued interest: Interest that has been earned but not received.

Accumulation plan: An arrangement which enables an investor to purchase mutual fund shares regularly in large or small amounts.

Annual Report: A financial report sent yearly to a publicly held firm's shareholders. This report must be audited by independent auditors.

Annuitant: An individual who purchases an annuity and will receive payments from that annuity.

Annuity: A contract that guarantees a series of payments in exchange for a lump sum investment.

Assets: What a firm or individual owns.

Balanced fund: A mutual fund which has an investment policy of "balancing" its portfolio generally by including bonds and shares in varying proportions influenced by the fund's investment outlook.

Bank Rate: The rate at which the Bank of Canada makes short-term loans to chartered banks and other financial institutions, and the benchmark for prime rates set by financial institutions.

Bear market: A declining financial market.

Blue chip: A descriptive term usually applied to high grade equity securities.

Bond: A long-term debt instrument with the promise to pay a specified amount of interest and to return the principal amount on a specified maturity date.

Bond fund: A mutual fund whose portfolio consists primarily of bonds.

Bull market: An advancing financial market.

Buying on margin: Purchasing a security partly with borrowed money.

Capital: Generally, the money or property used in a business. The term is also used to apply to cash in reserve, savings, or other property of value.

Capital loss: The loss that results when a capital asset is sold for less than its purchase price.

Capital stock: All ownership shares of a company, both common and preferred.

Cash equivalent: Assets that can be quickly converted to cash. These include receivables, Treasury bills, short-term commercial paper and short-term municipal and corporate bonds and notes.

Cash surrender value: The amount of cash a person may obtain by voluntarily surrendering a life insurance policy.

Certificate: A document providing evidence of ownership of a security such as a stock or bond.

Closed-end fund: A fund company that issues a fixed number of shares. Its shares are not redeemable, but are bought and sold on stock exchanges or the over-the-counter market.

Common stock: A security representing ownership of a corporation's assets. Voting rights are normally accorded to holders of common stock.

Compounding: The process by which income is earned on income that has previously been earned. The end value of the investment includes both the original amount invested and the reinvested income.

Consumer price index: A statistical device that measures the change in the cost of living for consumers. It is used to illustrate the extent that prices have risen or the amount of inflation that has taken place.

Debt: An obligation to repay a sum of principal, plus interest. In corporate terms, debt often refers to bonds or similar securities.

Deferral: A form of tax sheltering that results from an investment that offers deductions during the investor's high-income years, and/or postpones capital gains or other income until after retirement or during another period when the income level is expected to change.

Deferred Profit Sharing Plan: A plan that allows an employer to set aside a portion of company profits from the benefit of employees. A corporation makes a contribution to the plan on behalf of an employee.

Defined benefit pension plan: A registered pension plan that guarantees a specific income at retirement, based on earnings and the number of years worked.

Defined contribution pension plan: a registered pension plan that does not promise an employee a specified benefit upon retirement. Benefits depend on the performance of investments made with contributions to the plan.

Distributions: Payments to investors by a mutual fund from income or from profit realized from sales of securities.

Diversification: The investment in a number of different securities. This reduces the risks inherent in investing. Diversification may be among types of securities, companies, industries or geographic locations.

Dividend: A per-share payment designated by a company's board of directors to be distributed among shareholders. For preferred shares, it is generally a fixed amount. For common shares, the dividend varies with the fortunes of the company and the amount of cash on hand. It may be omitted if business is poor or the directors withhold earnings to invest in plant and equipment.

Dividend fund: A mutual fund that invests in common shares of senior Canadian corporations with a history of regular dividend payments at above average rates, as well as preferred shares.

Dividend tax credit: An income tax credit available to investors who earn dividend income through investments in the shares of Canadian Corporations.

Dollar cost averaging: A principle of investing which entails the use of equal amounts for investment at regular intervals in the hope of reducing average share cost by acquiring more shares in periods of lower securities prices and fewer shares in periods of higher securities prices.

Earned income: For tax purposes, earned income is generally the money made by an individual from employment. It also includes some taxable benefits. Earned income is used as the basis for calculating RRSP maximum contribution limits.

Equity: The net worth of a company. This represents the ownership interest of the shareholders (common and preferred) of a company. For this reason, shares are often known as equities.

Equity fund: A mutual fund whose portfolio consists primarily of common stocks.

Fixed assets: Assets of a long-term nature, such as land and buildings.

Fixed dollar withdrawal plan: A plan that provides the mutual fund investor with fixed-dollar payments at specified intervals, usually monthly or quarterly.

Fixed income investments: Investments that generate a fixed amount of income that does not vary over the life of the investment.

Fixed-period withdrawal plan: A plan through which the mutual fund investor's holdings are fully depleted through regular withdrawals over a set period of time. A specific amount of capital, together with accrued income, is systematically exhausted.

Growth stocks: Shares of companies whose earnings are expected to increase at an above-average rate. Growth stocks are often typified by their low yields and relatively high price/earnings rations. Their prices reflect investors' belief in their future earnings in growth.

Guaranteed investment certificates: A deposit instrument paying a predetermined rate of interest for a specified term, available from banks, trust companies and other financial institutions.

Income funds: Mutual funds that invest primarily in fixed-income securities such as bonds, mortgages and preferred shares. Their primary objective is to produce income for investors, while preserving capital.

Index fund: A mutual fund that matches its portfolio to that of a specific financial market index, with the objective of duplicating the general performance of the market in which it invests.

Inflation: A condition of increasing prices. In Canada , inflation is generally measured by the Consumer Price Index.

Interest: Payments made by a borrower to a lender for the use of the lender's money. A corporation pays interest on bonds to its bondholders.

International fund: A mutual fund that invests in securities of a number of countries.

Investment adviser: Investment counsel to a mutual fund. Also may be the manager of a mutual fund.

Investment counsel: A firm or individual which furnishes investment advice for a fee.

Leverage: The financial advantage of an investment that controls property of greater value than the cash invested. Leverage is usually achieved through the use of borrowed money.

Liabilities: All debts or amounts owing by a company in the form of accounts payable, loans, mortgages and long-term debts.

Life annuity: An annuity under which payments are guaranteed for the life of the annuitant.

Life expectancy adjusted withdrawal plan: A plan through which a mutual fund investor's holdings are fully depleted while providing maximum periodic income over the investor's lifetime.

Liquidity: Refers to the ease with which an investment may be converted to cash at a reasonable price.

Long-term debt: Debt that becomes due after more than one year.

Management expense ratio: A measure of the total costs of operating a fund as a percentage of average total assets.

Management fee: The sum paid to the investment company's adviser or manager for supervising its portfolio and administering its operations.

Marginal tax rate: The rate of tax on the last dollar of taxable income.

Market index: A vehicle used to denote trends in securities markets. The most popular in Canada is the Toronto Stock Exchange 300 Composite Index (TSE 300).

Market price: In the case of a security, market price is usually considered the last reported price at which the stock or bond is sold.

Maturity: The date at which a loan or bond or debenture comes due and must be redeemed or paid off.

Money market: A sector of the capital market where short term obligations such as Treasury bills, commercial paper and bankers' acceptances are bought and sold.

Money market fund: A type of mutual fund that invests primarily in treasury bills and other low-risk, short-term investments.

Money purchase pension plan: Another term for defined contribution pension plan.

Mortgage fund: A mutual fund that invests in mortgages. Portfolios of mortgage funds usually consist of first mortgages on Canadian residential property, although some funds also invest in commercial mortgages.

Mortgage-backed securities: Certificates that represent ownership in a pool of mortgages. The holders of these securities receive regular payments of principal and interest.

Mutual fund: An investment entity that pools shareholder or unit holder funds and invests in various securities. The units or shares are redeemable by the fund on demand by the investor. The value of the underlying assets of the fund influences the current price of units.

Net asset value: The value of all the holdings of a mutual fund, less the fund's liabilities.

No-load fund: A mutual fund that does not charge a fee for buying or selling its shares.

Pension adjustment: An amount that reduces the allowable contribution limit to an RRSP based on the benefits earned from the employee's pension plan or deferred profit sharing plan.

Pension plan: A formal arrangement through which the employer, and in most cases the employee, contribute to a fund to provide the employee with a lifetime income after retirement.

Permanent life insurance: Life insurance coverage for which the policyholder pays an annual premium, generally for the life of the insured. This type of policy features a savings component, known as the cash surrender value.

Portfolio: All the securities which an investment company or an individual investor owns.

Preferred share: An ownership security, senior to the common stock of a corporation, with preferred claim on assets in case of liquidation and a specified annual dividend.

Prospectus: The document by which a corporation or other legal entity offers a new issue of securities to the public.

Real estate fund: A mutual fund that invests primarily in residential and/or commercial real estate to produce income and capital gains for its unit holders.

Real estate investment trust: A closed-end investment company that specializes in real estate or mortgage investments.

Registered Education Savings Plan (RESP): A plan that enables a contributor, on a tax deferral basis, to accumulate assets on behalf of a beneficiary to pay for a post secondary education.

Registered Retirement Income Fund (RRIF): A maturity option available for RRSP assets to provide a stream of income at retirement.

Registered Retirement Savings Plan (RRSP): A retirement savings plan to hold amounts deducted from taxable income, within certain limits, in a tax deferred state. There are various investment options and a tax deferral on investment income and gains. Available to individuals to and including 69 years of age, but must be collapsed by the end of the year in which the holder turns 69 years of age.

Risk: the possibility of loss; the uncertainty of future returns.

Sales charge: In the case of mutual funds, these are commissions charged to holder of fund units, usually based on the purchase or redemption price. Sales charges are also known as "loads."

Shares: A document signifying part ownership in a company. The terms "share" and "stock" are often used interchangeably.

Simplified prospectus: An abbreviated and simplified prospectus distributed by mutual funds to purchasers and potential purchasers of units or shares (see prospectus).

Specialty Fund: A mutual fund that concentrates its investments on a specific industrial or economic sector or a defined geographical area.

Systematic Withdrawal Plan: Plans offered by mutual fund companies that allow unit holders to receive payment from their investment at regular intervals.

Tax Credit: An income tax credit that directly reduces the amount of income tax paid by offsetting other income tax liabilities.

Tax Deduction: A reduction of total income before the amount of income tax payable is calculated.

Term Insurance: Temporary life insurance that covers the policyholder for a specific time.

Term to 90 Annuity: An annuity that pays a fixed amount each year until it is exhausted in the year that the annuitant turns 90.

Trade: A securities transaction.

Treasury Bill (T-bill): Short-term government debt. Treasury bills bear no interest, but are sold at a discount. The difference between the discount price and par value is the return to be received by the investor.

Universal Life Insurance: A life insurance term policy that is renewed each year and which has both an insurance component and an investment component. The investment component invests excess premiums and generates returns to the policyholder.

Variable Life Annuity: An annuity providing a fluctuating level of payments, depending on the performance of its underlying investments.

Vesting: In pension terms, the right of an employee to all or part of the employer's contributions, whether in the form of cash or as a deferred pension.

Voluntary Accumulation Plan: A plan offered by mutual fund companies whereby an investor agrees to invest a predetermined amount on a regular basis.

Wrap Account: An account offered by investment dealers whereby investors are charged an annual management fee based on the value of invested assets.

Yield: Annual rate of return received on investments, usually expressed as a percentage of the market price of the security.

¹ Source: © 2007 The Investment Funds Institute of Canada