IFC TXT Glossary 2021 12 EN V01 PDF

Glossary
alpha annuity
A
A statistical measure of the value A sum of money invested with a life
a fund manager adds to the insurance company that is paid out to
account closing fees performance of the fund managed. the investor based on a predetermined
A charge levied by some mutual funds If alpha is positive, the manager has formula. The annual payouts are
when clients close their accounts. added value to the portfolio. If the composed of both the initial amount
alpha is negative, the manager has invested and returns generated.
accredited investor underperformed the market.
An individual or institutional investor appraisal firms
who meets certain minimum alternative managed products Firms that engage in the business of
requirement relating to income, net Professionally managed portfolios of collecting mutual fund performance
worth, or investment knowledge. Also basic asset classes and/or commodities information and report this
referred to as a sophisticated investor. and include segregated funds, hedge information on a regular basis.
funds, commodity pools, exchange-
accumulation plan traded funds, income, trusts, closed- arbitrage transactions
A plan offered by a mutual fund end funds and principal protected The simultaneous purchase and
company that enables investors to notes (PPN). sale of securities traded on different
make automatic periodic purchases of exchanges.
units of a particular mutual fund. amortization
Gradually writing off the value of an arithmetic mean
acquisition fee intangible asset over a period of time. A somewhat inaccurate method of
See Front-end Load. Commonly applied to items such as calculating average annual return. It
goodwill, improvements to leased involves adding up the annual returns
active portfolio management premises, or expenses of a new stock and dividing by the number of years.
An investment management style or bond issue.
employed by managers who believe arrears
that financial markets present amortization period Interest or dividends that were not
occasional inefficiencies which can The period during which the entire paid when due but are still owed. For
be exploited to earn excess returns. principal amount of a mortgage loan example, dividends owed but not paid
Proponents of this approach will try to is to be repaid to the mortgagee. to cumulative preferred shareholders
add value through strategies such as accumulate in a separate account
market timing and individual security amortized cost (arrears). When payments resume,
selection. This cost reflects the fact that dividends in arrears must be paid to
mortgages might have entered the the preferred shareholders before the
adjusted cost base portfolio when the market rate for common shareholders.
The deemed cost of an asset them was different from their fixed
representing the sum of the amount rate. ask price
originally paid plus any additional The lowest price at which a seller will
costs, such as brokerage fees and Annual Information Form (AIF) accept for the financial instrument
commissions. A document that contains information being quoted.
not included in a simplified prospectus
administrative bodies or annual financial statements. asset allocation
Provincial and territorial securities The weight of the various components
administrators such as securities annuitant (cash, debt, equity, and money market
commissions or other regulatory The person on whose life insurance securities) of an investor’s portfolio.
bodies that operate within the benefits are based.
provincial and territorial governments. assets
Powers and operations include All things of value that are owned by a
registration, disclosure, and firm or individual.
investigation and prosecution.
© CANADIAN SECURITIES INSTITUTE

G • 2 INVESTMENT FUNDS IN CANADA
assets under management (AUM) bearer bond

B
The assets managed by an investment A bond that is not registered in the
firm. name of a particular investor and can
back-end load be negotiated by any holder.
auction market A type of sales fee that is paid by the
Market in which securities are bought investor when the funds are redeemed behavioural biases
and sold by brokers acting as agents or sold. This fee is calculated on either Systematic errors in financial judgment
for their clients, in contrast to a dealer the initial purchase value or the current or imperfections in the perception of
market where trades are conducted price which includes any increase in economic reality.
over-the-counter. For example, the value.
Toronto Stock Exchange is an auction behavioural finance
market. balance of payments
A field of study that combines
Accounts maintained by a country to psychology and economics to explain
audit record international activities, such why and how investors act and how
A professional review and examination as foreign trade and international that behaviour affects financial
of a company’s financial statements borrowing and lending. Balance of markets.
required under corporate law for payments accounts actually comprise
the purpose of ensuring that the two separate accounts: the Current
benchmark
statements are fair, consistent and account and the Capital account.
An index or fund that enables you
conform with International Financial to compare the success of a fund or
Reporting Standards (IFRS). balanced mutual funds
portfolio manager.
Hold a diversified portfolio of different
auditor’s report types of securities: bonds, stocks, and
benchmark index
An independent report on the accuracy money market securities. Often, the
An index that reflects a mutual
and validity of a company’s financial fund manager will vary the proportions
fund’s investment universe and can
statements. depending on market conditions.
be used as a standard against which
performance can be measured.
Autorité des marchés financiers bank rate
(AMF) The minimum rate at which the Bank
beneficiary
The body that administers the of Canada will lend money on a short-
The person who will receive the
regulatory framework surrounding term basis to the chartered banks and
benefits payable under the contract
Québec’s financial sector: securities other members of Payments Canada in
upon death of the annuitant.
sector, the distribution of financial its role as lender of last resort.
products and services sector, the best practical allocation
financial institutions sector and the bankers’ acceptance
An asset allocation where the risk and
compensation sector. A commercial draft (i.e., a written
return levels are adjusted based upon
instruction to make payment) drawn
a client’s behavioural tendencies. A
availability bias by a borrower for payment on a
best practical allocation may slightly
A method that allows people to specified date. A BA is guaranteed at
underperform over the long term, but
estimate the probability of an outcome maturity by the borrower’s bank. As
is an allocation that the client can
based on how prevalent or familiar with T-bills, BAs are sold at a discount
comfortably adhere to over the long
that outcome appears in their lives. and mature at their face value, with
run.
the difference representing the return
to the investor. BAs may be sold before
average beta
maturity at prevailing market rates,
A statistical tool used to measure the The standard measure of market risk.
generally offering a higher yield than
direction of the market. The most It shows how much a security or a
Canada T-bills.
common average is the Dow Jones portfolio fluctuates when the market
Industrial Average. as a whole fluctuates.
basis point
A unit equal to 1/100 of 1%.
average annual return biases
The average of the simple annual Personal beliefs that may lead to
bear market
returns earned on an investment over irrational or emotional choices and
a given number of years. A sustained decline in equity prices.
decisions.
Bear markets are usually associated
with a downturn (recession or
contraction) in the business cycle. bid price
The highest price at which a buyer will
pay for the financial instrument being
quoted.

GLOSSARY G • 3
board of directors call premium capital growth

Those that hold the ultimate Is measured by the difference between An investment with this return
responsibility for a mutual a security’s par value and the price objective will have an appreciable level
fund’s activities, ensuring that the issuer must pay to call it for of risk and will be expected to increase
the investments are in keeping with retirement. in value over the long term. See also
the fund’s investment objectives. Capital Gains.
Canada Education Savings Grants
bond (CESG) capital loss
A bond is a debt security that may An incentive program for those Selling a security for less than its
be issued by either a government or investing in a Registered Education purchase price. Capital losses can
a corporation. The issuer of a bond Savings Plan (RESP) whereby the only be applied against capital gains.
promises to pay a stipulated rate of federal government will make a Surplus losses can be carried forward
interest (coupon rate) and to pay back matching grant of a maximum of $500 indefinitely and used against future
the principal or par value at maturity. to $600 per year of the first $2,500 capital gains. Only 50% of the loss can
contributed each year to the RESP of a be used to offset any taxable capital
bond fund child under age 18. loss.
A fixed-income fund that invests
principally in government and Canada Pension Plan (CPP) career average plan
corporate bonds. A government sponsored pension plan Pension is calculated as a percentage
to which all employed residents in of an employee’s earnings over the
Branch Compliance Officer (BCO) Canada (except Québec) contribute. course of her career (while in the
The person responsible for ensuring Contribution to the plans is automatic. plan). Employees may contribute a
compliance with the regulatory Starting from age 65, pensioners fixed percentage of their salary (such
requirements within the branch by receive a modest monthly amount. as 5%) to this type of plan. Employer
monitoring the conduct of the mutual contributions required to fund the
fund salespeople. Canadian Investment Funds defined benefit vary according to
Standards Committee (CIFSC) factors such as investment yield,
bull market The body that oversees mutual mortality and employee turnover.
A general and prolonged rising trend in fund classification. The CIFSC tracks
security prices. Bull markets are usually investment funds on a security-by- carry forward
associated with an expansionary phase security holdings basis. In the case of RRSPs, it refers to
of the business cycle. As a memory aid, unused contribution room that can
it is said that a bull walks with his head capital be used to reduce taxable income
up while a bear walks with his head Has two distinct but related meanings. in future periods. In general, unused
down. To an economist, it means machinery, contributions can be carried forward
factories and inventory required to indefinitely.
business cycle produce other products. To an investor,
The series of short-term fluctuations of it may mean the total of financial cash account
national income over definite periods. assets invested in securities, a home An account in which no borrowing is
and other fixed assets, plus cash. permitted.
capital and financial account cash flow

C One of the two accounts of the The amount of money coming in from
balance of payments that records the all sources of income and the amount
flow of payments between countries to of money going out to pay bills.
call
finance the acquisition of assets such
A call feature allows the issuing as stocks, bonds and real estate. cash flow from operations/total
corporation to redeem, or pay back,
debt ratio
the bondholders before the stated
capital gain A ratio that gauges a company’s ability
maturity date. Also known as a
redemption. When an investor sells an asset for to repay the funds it has borrowed.
more than its purchase price, a capital Cash flow/total debt ratio = cash flow
gain is realized. Only 50% of capital / total debt.
call option
gains is taxable; 50% remains tax free.
Gives its owner the option of buying
cash management
shares at the fixed exercise price prior
to the call’s expiration date. A central bank process of controlling
the national money supply through
the buying or selling of bonds in the
market.

Chambre de la sécurité financière collateral consumer price index (CPI)

The Chambre is responsible for setting Secures a bond by a pledge of an asset A measure of the average of the prices
and monitoring continuing education in the case of default. paid for a basket of goods and services
requirements and for enforcing a code compared to a base year.
of ethics in the province of Quebec. commercial paper
A short-term debt security whose contract holder
client name account issuer promises to pay the maturity The owner of a segregated fund
The opposite of a nominee account. value by a stated date. Commercial contract.
A client name account is an account paper is issued by very creditworthy
registered directly in the name of the companies and is therefore quite contraction
client of the account with the mutual liquid. The phase of the economic cycle that
fund. follows the peak. During a contraction,
common shares (common stock) economic activity declines.
client service A common share is said to represent
This involves fully understanding and residual ownership of the issuing contractionary
satisfying the unique needs of each company and is therefore entitled to a A monetary policy that seeks to reduce
client. vote at shareholder meetings. It does the size of the money supply.
not have a stated maturity date and
closed mortgage is only paid dividends once preferred contribution in kind
Can often be repaid prior to the end of shareholders have been paid.
Transferring securities into an RRSP.
the term, but a penalty will apply. The general rules are that when an
comparison universe asset is transferred there is a deemed
closed-end discretionary funds A collection of portfolios that form the disposition. Any capital gain would be
Funds that have the flexibility to basis for comparison. reported and taxes paid. Any capital
buy back their outstanding shares losses that result cannot be claimed.
periodically. compliance
Following the rules, whether those contribution room
closed-end fund rules are legal requirements or dealer If you do not contribute the maximum
Shares of these funds are bought policies. allowable amount to your RRSP in any
and sold on the open market. A fixed given year, you can carry forward the
number of shares are issued and their compounding unused contribution indefinitely to
value depends on market demand and The effect of reinvesting (rather future years. The contribution room is
on the value of the securities held by than spending) the returns on an the annual unused contribution carried
the fund. investment, so that investors earn a forward.
“return on a return”.
code of ethics conventional mortgage
A code that establishes norms based concentration risk When the amount of the mortgage
upon the principles of trust, integrity, ETFs are not subject to individual stock loan does not exceed 80% of the
justice, fairness, honesty, responsibility or sector exposure limits that normally appraised value of the pledged
and reliability. are part of a mutual fund’s investment property.
objective. If particular sectors have
cognitive bias had extraordinarily large gains, then convertible bond
Basic statistical, information it is possible for the ETF to be highly Can be converted to a given number
processing or memory errors that are concentrated in a single stock (in of common shares, generally of the
common to all human beings. They can excess of 10%) or sector (in excess of same company. Conversion is usually
be thought of also as “blind spots” or 40%). permitted during periods determined
distortions in the human mind. by the issuer or the issuer can force
confidentiality conversion if market conditions
coincident indicators All information concerning the client’s warrant it.
Economic indicators that behave transactions and his or her accounts
similarly and simultaneously with the must be considered confidential and corporate bonds
economy. Coincident indicators help must not be disclosed except with the Are issued by corporations mainly to
economists to determine which phase client’s permission, for supervisory finance the acquisition of equipment.
of the business cycle an economy is purposes or by order of the proper They are subject to interest rate risk
currently in. Examples include gross authority. but, unlike government bonds, are also
domestic product (GDP), personal subject to default risk. Often, specific
income, and retail sales. assets are pledged as collateral to
guarantee repayment of the debt.

GLOSSARY G • 5
correlation current assets death benefits

A statistical measure of the degree Are assets that are expected to be In a segregated fund, the contract
to which the returns on a security are converted to cash within one year. holder’s beneficiary or estate is
associated with the returns on another Cash or cash equivalents are also guaranteed to receive payouts
security. considered current assets. amounting to at least the original
premiums invested by the contract
cost-push inflation current income holder, excluding sales commissions
A type of inflation that develops due to Earned from fixed-income funds that and certain other fees. The amount
an increase in the costs of production. make regular interest or dividend of the death benefit is equal to the
For example, an increase in the price payments to the holder. Generally, an difference, if any, between the net
of oil may contribute to higher input investor seeking current income has asset value of the fund and the original
costs for a company and could lead to the intention of living off the proceeds. amounts invested.
higher inflation.
current liabilities debentures
coupon Are liabilities that are expected to be Are bonds that have no assets pledged
The promise made by the bond to settled within one year. as collateral in the case of default.
make semi-annual payments to the
bondholder. current ratio debt instruments
A liquidity ratio that is calculated by Money borrowed from lenders for
coupon rate dividing a firm’s current assets by its a variety of purposes. The borrower
The periodic (almost always semi- current liabilities. typically pays interest for the use of
annual) interest payment that the the money and is obligated to repay it
issuer of a bond has promised to pay current yield at a set date.
the bondholder. Is computed by dividing the coupon or
dividend payment for one year by the debt security
credit rating current market price of the security. A debt security, such as a bond,
The grading of a company based on The current yield is used to compare evidences a loan which has been made
the company’s ability to pay back the short-term return on different by the investor to the issuer. The issuer
credit. A high credit rating means that securities. For a money market of a debt security essentially borrows
the company is very likely to pay back mutual fund, it is the last seven days’ money from the investor and thereby
loans and is not a default risk. annualized yield; it does not assume incurs a debt.
compounding of returns.
cumulative debt/equity ratio
A preferred stock having a provision custodian A financial leverage ratio that
that if one or more of its dividends Handles the disbursement and receipt determines the relationship of debt to
are not paid, the unpaid dividends of funds as well as the safekeeping equity.
accumulate in arrears and must be of the securities. This function is
paid before any dividends may be paid performed by a trust company or bank. declaration of trust
on the company’s common shares. A legal document establishing the
cyclical unemployment fund’s structure, indicating its principal
currency The type of unemployment that rises investment objectives, investment
The money used as a form of payment when the economy weakens and falls policy, any restrictions on the fund’s
by a country. when it recovers. investments, who the fund’s trustee,
manager and custodian will be, and the
currency forward contract classes or series of units the fund may
have, among other things.
A contract between two parties that
locks in the exchange rate for the D
purchase or sale of a currency on a deemed disposition
future date. Under certain circumstances, taxation
dealer market
rules state that a transfer of property
A market in which securities are has occurred, even without a purchase
current account bought and sold over-the-counter in or sale, e.g., there is a deemed
One of the two accounts of the which dealers acts as principals when disposition on death or emigration
balance of payments that records the buying and selling securities for clients. from Canada.
net trade of goods and services, net Also referred to as the unlisted market.
payments of interest abroad and net
transfers between countries.

default risk depreciation disinflation

This is the risk that a mortgage, bond, The amount by which the value of A decline in the rate at which prices
or preferred share will not make fixed assets is periodically decreased rise – i.e., a decrease in the rate of
its anticipated interest or dividend to reflect the effects of regular wear inflation. Prices are still rising, but at a
payment, or principal will not be repaid and tear. slower rate.
at maturity (in the case of mortgages
and bonds). derivatives (derivative securities) diversification
A security whose value is determined The process of reducing investment
deferred sales charge by the value of some other security risk by investing in different types of
See Back-End Load. or asset. An example of a derivative securities issued by companies active
would be an option or a future. in different industries. Ideally, these
defined benefit plan securities will not all have the same
A type of employer-sponsored pension direct distribution response to economic and other
plan that allows the employee to A mutual fund company that has events — as some decrease, others will
determine the amount of the eventual its own centralized order-taking hopefully increase.
pension benefits with relative department and sales staff is said to
accuracy. Generally, the benefits are engage in direct distribution. dividend fund
a given percentage of the employee’s A type of fixed-income fund that holds
salary and are often based on the directional strategies dividend paying common shares and
number of years of service. Hedge fund strategies that bet on possibly preferred shares. Dividend
anticipated movements in the market funds are distinguished from preferred
defined contribution (money prices of equities, debt securities, dividend funds by the fact that they
purchase) plan foreign currencies, and commodities. tend to hold mostly common shares.
A type of employer-sponsored
pension plan that does not allow the disclosure dividend income
employee to determine the amount Includes insider reports, regular The dividends received from an
of the eventual pension benefits in corporate financial reports, timely investment in common and preferred
advance. The benefits received depend disclosure of material changes in the shares.
on how successfully the contributions affairs of a company and examination
have been invested over the years. of all prospectuses to ensure that there dividend tax credit (DTC)
The employee and the employer both is full, true, and plain disclosure. Proper Refers to the preferential tax treatment
contribute to the plan. disclosure allows investors to make granted to dividend income (common
informed choices. and preferred) received from taxable
deflation Canadian corporations. The dividend is
A decrease in the general price level discount grossed up by 38% and the tax credit
of goods and services in a country. Occurs when the price of a mutual of 15.02% is calculated based on this
Deflation occurs when the inflation fund is below its net asset value. amount.
rate falls below 0%.
discouraged workers dividend yield
demand Individuals that are available and Dividends earned during ownership
The tendency of consumers to willing to work but cannot find jobs of shares.
buy more of a good when its price and have not made specific efforts to
decreases and less when its price find a job within the previous month. dollar cost averaging
increases. Involves periodically (e.g., monthly)
discretionary funds purchasing a fixed dollar amount of
demand-pull inflation Savings that are not needed for mutual fund units. As the unit price
Inflation that occurs when demand in day‑to‑day living. fluctuates, so will the number of units
an economy outpaces supply. purchased. By investing regular dollar
discretionary income amounts in an increasing market, the
deposit-taking institution average cost per unit tends to be lower
The amount of money coming in from
Companies, such as banks and trust over the long run.
employment and other sources minus
companies, that pool the deposits of the amount of money going out to pay
thousands of savers and then invest bills. drawdowns
those funds in different types of A transfer of deposits from the
investments. discretionary trading chartered banks to the Bank of Canada.
Any purchase or sale where the sales
representative determines the timing
and/or price of a sale or purchase.

GLOSSARY G • 7
dual employment effective yield enforcement

Persons that are dually registered as In the case of money market mutual Securities Administrator enforcement
mutual fund sales representatives and funds, this calculation makes the may include investigating and
life insurance agents. assumption that the yield generated prosecuting offenders who violate
over the last seven days will remain securities regulations. Securities
duration constant for one year into the future. administrators have the authority to
A measure of a bond or a bond It assumes weekly compounding of subpoena witnesses, seize documents
portfolio’s sensitivity to changes in returns at that rate. for examination and operate as
interest rates. The higher (lower) administrative tribunals. The securities
the duration, the greater (smaller) efficient administrators may also prosecute a
the change in the value of a bond in If markets are efficient, the prices of violator in the courts, which may result
response to a given change in interest securities reflect all the information in imprisonment and/or substantial
rates. that exists about them. fines.
duty of care efficient market equilibrium price

A legal obligation imposed on mutual The prices of stocks or securities reflect The price at which the quantity
funds representatives requiring that all of the information that may exist demanded equals the quantity
they adhere to a standard of care about those stocks or securities. supplied.
while performing any acts that could
foreseeably harm others. electronic commerce (e-commerce) equities (equity instruments)
Business activities, such as purchasing, An investment instrument that
distribution, sales, and other provides an ownership stake in a
transactions, that take place by means company.
E of advanced communications and
computer technologies. equity growth fund
earned income This type of fund seeks out smaller
For an individual, it includes all income electronic document firms that are expected to pay little or
from employment but it excludes Data recorded or stored in a computer no dividends and to produce significant
income from investments and any system or other similar device and capital gains as their share prices
pension or unemployment benefits that can be read or perceived by a increase. As a result, equity growth
received. person or a computer system or other mutual funds tend to have a lot of
similar device. This includes displays, volatility and are suitable for investors
printouts, and other output of that with higher risk tolerance.
earnings per common share (EPS)
A shareholder ratio that is calculated data.
equity index fund
by dividing net income by the number
of common shares outstanding. electronic signature Has the primary goal of earning capital
Shareholders like to see consistent A signature in digital form that gains by constructing a portfolio
increases in EPS over time. is incorporated in, attached to, designed to mimic a particular stock
or associated with an electronic market index — often the S&P/TSX
document. Composite Index in Canada.
economic indicators
These are a group of statistics that
emotional bias equity mutual fund
provide information about the
direction and level of activity of the The opposite illogical or distorted Seeks to earn some combination of
economy. reasoning. An emotion is a mental current dividend income and capital
state that arises spontaneously, gains. It generally invests in common
rather than through conscious effort. shares of larger firms with strong
economics
Emotions are physical expressions, dividend records and limited capital
A social science that is concerned gains potential.
with an understanding of production, often involuntary, related to feelings,
distribution, and consumption of perceptions or beliefs about elements,
objects, or relations between them, in ethical conduct
goods and services.
reality or in the imagination. The conduct of complying not only
with the letter of the law but also with
Endowment bias the spirit of the law.
People who are subject to endowment
bias place more value on an asset ethical decision-making
they hold property rights to than on Decision-making based on the
an asset they do not hold property principles of trust, integrity, justice,
rights to. fairness, honesty, responsibility, and
reliability.

ethical responsibility explicit costs financial intermediaries

The responsibility of the investment Costs that are directly borne by the Suppliers and users of capital access
guide to ensure that the client’s needs investor. They fall into three categories: the markets through the chartered
are respected and placed before the management fees, operating expenses, banks, trust companies, life insurance
guide’s own needs (e.g., attaining and sales charges. companies, and investment dealers.
a sales target) and those of the These financial intermediaries can be
employer. extra dividend either deposit-taking or non-deposit-
A dividend paid in addition to the taking institutions.
ethics regular dividend.
The moral principles that go beyond financial market
prescribed behaviour and addresses The mechanism through which
situations where rules are unclear or suppliers and users of capital are
contradictory. F matched.
event-driven strategies fairness financial planner

Hedge fund strategies that seek to All relevant information that might A professional holding a recognized
profit from unique events such as have an impact on an investor’s designation (CFP, ChP or PFP) who
mergers, acquisitions, stock splits and decision to buy or to sell must be fully assists clients in establishing and
stock buybacks. disclosed. reaching financial goals by analysing
current finances and making
excess returns recommendations on reaching
final average plan
The possibility of returns above those financial goals. The Mutual Funds Sales
Bases the pension on an employee’s Representative is not expected to play
needed to compensate for the risk of length of service and average earnings
an investment. Undervalued stocks the role of financial planner.
over a stated period of time. Often
offer the possibility of excess returns. this is the average of the best five
financial planning pyramid
consecutive years of earnings in the
exchange rate last 10 years of employment, or the A visual aid that can be used to help
The price at which one currency average of the best three consecutive build a financial plan and prioritize
exchanges for another. years of earnings over the last five decision making around asset choices.
years of employment.
exchange rate risk financial statement analysis
The risk that an unexpected change final good The process of examining and working
in exchange rates will alter the value A finished product that is purchased by with the firm’s financial accounting
of foreign assets or cash payments the ultimate end-user. information in order to assess value
expected from a foreign source. This and financial soundness.
type of risk applies to global mutual Financial Action Task Force (FATF)
funds. See also Foreign Exchange Risk. first-order risks
An inter-governmental body whose
purpose is to develop and promote Risks associated with the direction
exchange-traded funds (ETFs) national and international policies of interest rates, equities, currencies
Baskets of securities traded like to combat money laundering and and commodities. Broadly speaking,
individual stocks on an exchange. ETFs terrorist financing. it refers to market-induced risk, or
are similar to index mutual funds in systematic risk.
that they will primarily invest in the financial circumstances
equities of companies that compose fiscal policy
Include the size of the client’s
the target index, but the way in which investment portfolio, employment A deliberate action by a government
an ETF is structured allows it to be and investment income, whether (federal, provincial or territorial)
far more tax efficient than an index the source of employment income to influence the economy through
mutual fund. is secure, and the level of periodic changes either in spending or in
expenses incurred. taxation initiatives.
expansion
The phase of the economic cycle financial goals and objectives
that follows the trough. During an A client’s reasons for selecting a given
expansion, economic activity increases. investment. May be expressed in terms
of the types of desired returns (e.g.,
expansionary growth, interest income) or in terms of
A monetary policy that seeks to desired investment characteristics such
increase the size of the money supply. as safety or liquidity.

GLOSSARY G • 9
fiscal year foreign exchange risk fund of funds

A company’s accounting year. Due to The risk that an unexpected change The investor owns units of a pool of
the nature of particular businesses, in exchange rates will alter the value mutual funds.
some companies do not use the of foreign assets or cash payments
calendar year for their bookkeeping. expected from a foreign source. This fund sponsor
A typical example is the department type of risk applies to global mutual The mutual fund investment firm.
store that finds December 31 too early funds.
a date to close its books after the fund wrap
Christmas rush and so ends its fiscal foreign investors A program that provides a series of
year on January 31. Retail or institutional investors who portfolios with multiple mutual funds
reside outside of a country, but invest to reflect pre-selected asset allocation
fixed assets in that country. models. It can be a fund of funds or a
Are those assets that are expected to portfolio allocation service.
last longer than one year. frequent trader
Individuals who buy and sell mutual fundamental analysis
fixed-dollar (constant) fund units actively, sometimes holding Security analysis that attempts
withdrawal plan positions for as little as one day. to determine the true or intrinsic
A type of systematic withdrawal value of a security by examining the
plan that allows investors to receive frequent trading charge fundamentals such as sales, earnings,
a periodic fixed amount of money Is assessed by some mutual funds to economic changes, competitive forces,
through the redemption of units of discourage investors from redeeming and management.
their mutual fund. their units shortly after purchase or
from switching between funds. futures contract
fixed-income funds A transferable agreement to deliver or
Consist of fixed-income securities. frictional unemployment take delivery of a fixed quantity of an
Fixed-income funds share the goal of The result of the labour turnover in asset for a specific price by a specific
generating current income. a normal, healthy economy, where future date.
people enter and leave the workforce
fixed-income securities and jobs are created and terminated.
Are securities that generate
predetermined periodic interest front-end load G
or dividend income. They include A sales fee that the investor pays
government and corporate bonds, when the fund is purchased. This fee is geometric mean
mortgages, and preferred shares. generally not charged by banks or trust A calculation that determines the
companies and is based on the dollar average compound return over several
fixed-period withdrawal plan value invested. time periods.
A systematic withdrawal plan that
allows the mutual fund investor fund distributors glide path
to receive money such that over a Represents the link between a mutual
specified period the mutual fund will A formula that defines the change in
fund and the investing public. A fund’s the asset allocation mix of a target
be completely paid out. distributor is often its investment date fund over time, based on the
company. number of years remaining to the
flat benefit plan
target date. The closer the target date,
An employee’s monthly pension is a fund facts the more conservative the asset mix.
specified number of dollars for each A short mutual fund document
year of service. designed to give investors key global equity funds
information that is relevant to their A type of global mutual fund that
forecast investment decisions, including facts earns dividends and capital gains.
To estimate the cash flow to be earned about the fund itself, performance
during the year as well as the price you history, investments, and the costs of
global mutual funds
think that you could sell a security for investing in the fund.
at the end of the year. These funds offer international
diversification by investing in the
fund manager
economies of specific countries
Provides day-to-day supervision of the or regions anywhere in the world,
fund’s investment portfolio. including Canada.

government bond guaranteed minimum withdrawal holdings-based style analysis

A debt security that is issued by the benefit plan Examines each stock in the portfolio
federal, provincial, and municipal A GMWB plan is similar to a variable and maps it to a style at a specific
governments in order to finance public annuity. With a GMWB, the client point in time.
spending. These bonds trade OTC, they purchases the plan, and the GMWB
have a wide range of maturities, and option gives the planholder the right household budget
they are considered to have little or no to withdraw a certain fixed percentage Outlines the individual or family
default risk. (7% is typical) of the initial deposit income and expenditures on a periodic
every year until the entire principal basis with the intention of determining
gross domestic product (GDP) is returned, no matter how the fund how much money will be available for
The market value, in current dollars, of performs. savings and investment.
all goods and services produced within
a country in one year. GDP includes hurdle rate
the value of all goods and services The rate that a hedge fund must
produced by Canadian citizens and H earn before its manager receives an
foreigners living in Canada and does incentive fee. Hurdle rates are usually
not include the value of goods and hard retraction based on short-term interest rates to
services produced by Canadian citizens With a hard retraction feature, the reflect the opportunity cost of holding
and businesses abroad. company must pay any redemption risk-free assets such as T-bills.
value in cash.
gross profit
The excess of sales revenues over the hedge funds
costs that were incurred to produce or Lightly regulated pools of capital run I
acquire the goods that were sold. by managers that have great flexibility
in applying their investment strategies. implicit costs
gross profit margin ratio
Trading costs, which are measured by
An operating performance ratio that hedging brokerage fees and turnover.
shows the company’s rate of profit The process of reducing the risk of loss
after allowing for cost of goods sold. from fluctuations in market prices — incentive fees
effectively locking in the value of a Fees that are usually calculated after
growth at a reasonable price (GARP) portfolio. Derivative securities can be the deduction of management fees and
A value approach to buying earnings used for this purpose. expenses and not on the gross return
growth. GARP managers, like growth earned by the manager.
managers, seek companies with high-water mark
projections of growing earnings and A fund manager is paid an incentive fee independent review committee
high and increasing ROEs (return only on net new profits. In essence, a
on equity) relative to the industry Under National Instrument 81-
high-water mark sets a bar (based on 107, mutual funds must have an
average. Unlike growth managers, the fund’s previous high value) above
GARP managers avoid stocks with high independent review committee
which the manager earns incentive which is required to either approve or
P/Es (price/earnings ratios) and P/Bs fees.
(price-to-book ratios). consider conflicts of interest that are
identified by the manager of the fund.
hindsight bias
growth investing
Refers to the belief that the outcome inflation
A form of equity investing that is more of an event was predictable, even if
concerned about the future prospects A generalized, sustained trend of rising
it was not. Therefore, people tend to prices.
of a firm than its present price. overestimate the accuracy of their own
predictions. inflation rate
Guaranteed Investment Certificate
(GIC) The rate of change in prices.
holding period return
A deposit instrument most commonly A transactional rate of return measure
available from trust companies, initial public offering (IPO)
that takes into account all cash
requiring a minimum investment at An issuing by a company that has
flows and increases or decreases in a
a predetermined rate of interest for a never issued shares before. It requires
security’s value for any time frame.
stated term. Generally nonredeemable an estimate of an appropriate offering
Time frames can be greater or less than
prior to maturity but there can be price for the shares.
a year.
exceptions.

GLOSSARY G • 11
insider interest rates investment horizon

An individual with inside information For consumers, interest rates represent The length of time within which an
of material significance about his the gain from deferring consumption investor expects a given investment
company that has not yet been made from today to tomorrow via saving. For to satisfy his investment or return
public. businesses, interest rates represent the objectives.
cost of borrowing money.
insider trading Investment Industry Regulatory
The act of trading in securities based international funds Organization of Canada (IIROC)
on undisclosed material non-public Mutual funds that invest anywhere in The Canadian investment industry’s
information. the world except in Canada. national self-regulatory organization.
IIROC carries out its regulatory
instalment debenture interval funds responsibilities through setting
A bond or debenture issue in which a See Closed-End Discretionary Funds. and enforcing rules regarding the
predetermined amount of principal proficiency, business and financial
matures each year. inventory turnover ratio conduct of dealer firms and their
registered employees and through
An operating performance ratio that
institutional investor setting and enforcing market integrity
measures the number of times a
rules regarding trading activity on
A legal entity that represents the company’s inventory is turned over
Canadian equity marketplaces.
collective financial interests of a in a year. It may also be expressed as
large group. A mutual fund, insurance a number of days required to achieve
company, pension fund and corporate turnover. investment knowledge
treasury are just a few examples. How familiar an investor is with the
investigation and prosecution risk and return characteristics of
integrity securities.
Violations are carefully scrutinized
Acting in an honest, fair, and and offenders may be prosecuted;
trustworthy way. the commission has the authority to investment manager
subpoena witnesses, seize documents (also known as a portfolio manager)
interest coverage ratio for examination and assume many Is responsible for constructing and
functions of an administrative tribunal. managing the investment portfolios
A financial leverage ratio that reveals
The securities commission may also that make up the various mutual funds
the ability of a company to pay the
prosecute an action against a violator. managed by an investment company.
interest charges on its debt and
indicates how well these charges are This may result in the levy of a
covered, based upon earnings available substantial fine and/or imprisonment. investment policy statement
to pay them. The statement that guides the overall
investment company asset management of the mutual fund
interest income The firm that receives the portfolio.
Income earned on fixed-income management fees from each of the
securities. mutual funds under its control. The investment portfolio
investment company is responsible The fundamental characteristic is
interest rate anticipation for hiring investment managers and that it is a diversified collection of
for organizing the distribution of the securities. Those securities may
A fixed-income investment philosophy
funds. include stocks, bonds, money market
that involves moving between long-
securities, and even derivatives.
term government bonds and very
short-term T-bills based on a forecast investment dealer
of interest rates over a certain time May act on the clients’ behalf as agent iShares CDN S&P/TSX 60 Index
horizon. Price sensitivity to interest in the transfer of instruments between Fund
rate movements increases as the term different investors, and may also act Units are traded on the Toronto Stock
to maturity increases and the coupon as principal. Investment dealers are Exchange and are bought and sold
decreases. also referred to as brokerage firms or through stockbrokers. The S&P/TSX
securities houses. 60 is composed of 60 of the largest
interest rate risk Canadian firms.
The basic feature of interest rate risk investment fund
is that as interest rates rise (fall), the Offers investors an interest in a pool of
value of all fixed-income securities will securities. Mutual funds are a type of
decrease (increase). investment fund.

leverage liquidity
J
The use of borrowed funds to invest. Refers to the readiness with which an
asset can be sold without requiring the
January Effect liabilities seller to make a large price concession.
Stocks in general, and small stocks The obligation to provide goods,
in particular, that move abnormally services, or cash at some time in the liquidity ratio
higher during the month of January. future. Simply stated: what is owed by A financial ratio that attempts to
a firm or an individual. determine a firm’s ability to meet its
short-term liabilities from its current
life annuity assets. See Current Ratio.
K An annuity whose payments are
guaranteed as long as the investor load
Know Your Client lives. Sales commission charged to individual
The mutual fund advisor must use investor. See Back-End Load and Front-
due diligence to learn the essential life-cycle hypothesis End Load.
facts relevant to every client and The basis of the hypothesis is that as
every order. Information concerning people age, their objectives, financial Locked-In Retirement Account
the client’s personal and financial and personal circumstances, and risk (LIRA)
circumstances, investment needs and tolerance change as well. Though When a registered pension plan
objectives, investment knowledge, the hypothesis is not infallible, it can is terminated prior to retirement
risk profile, and investment time facilitate the task of “knowing your (e.g. when an individual changes
horizon, is required in order to client.” employers), plan funds may be
make an appropriate investment transferred to a LIRA. The funds cannot
recommendation. Life Income Fund (LIF) be withdrawn before the holder
A termination option available to reaches a designated age.
Know Your Product holders of locked-in pension funds
Understand the characteristics such as a LIRA. A LIF is similar to lock-limit up
(e.g. risk level, fees, type of income a RRIF but it has both a minimum When a commodity contract has
generated, and tax consequences) of and a maximum annual withdrawal reached it’s permitted daily price limit
all the funds offered for sale. requirement. Funds from a standard on the upside, the commodity is said
RRSP are not transferable to a LIF. to trade lock-limit up. When lock-
limit up (or lock-limit down on the
life insurance downside), trading can only take place
L A contract between an insured at the lock-limit up price or lower on
holder and an insurer, where the that day.
labour force insurer promises to pay a designated
The sum of the population aged beneficiary a sum of money in Locked-In RRSP
15 years and over who are either exchange for a premium, upon the The holder of a locked-in plan cannot
employed or unemployed. death of the insured person. withdraw any of the money until
the holder reaches a particular age
lagging indicators life withdrawal plan depending upon the province of
Similar to the fixed-period plan, except residence.
An economic indicator that measures
that change after an economy has the period selected is the expected
passed through a phase in the business remaining lifetime of the investor. long position
cycle. Signifies ownership of securities. “I am
limit order long 100 BCE common” means that
leading indicators An order to buy or sell a security at a the speaker owns 100 common shares
specific price or better. of BCE Inc.
An economic indicator that helps to
determine which phase of the business
cycle is likely to occur in the future. limited partnership long-term liabilities
A type of partnership whereby a Are liabilities that are not likely to be
legal responsibility limited partner cannot participate in paid off within one year.
The responsibility of the investment the daily business activity and liability
guide to ensure that each client is limited to the partner’s investment. loss aversion
buys only suitable investments. All A stronger impulse to avoid losses than
provincial securities acts make this to acquire gains.
legal responsibility clear.

GLOSSARY G • 13
market material fact

M
Any arrangement whereby products A fact that, if correctly stated, would
and services are bought and likely lead investors to change their
macroeconomics sold, either directly or through purchase decision.
The field of assessing the performance, intermediaries.
structure, and behaviour of the maturity date
economy as a whole. market efficiency The date at which the bondholder
This hypothesis argues that all expects to get the par value of the
managed futures available information about the bond back.
Involves the active trading of markets is reflected in market prices,
derivatives products and strategies on which is to say that it is impossible to maturity guarantee
physical commodities, financial assets earn excess returns by simply using The minimum dollar value of the
and currencies. publicly available information. contract after the guarantee period,
usually 10 years. This amount is also
managed products market order known as the annuity benefit.
Professionally managed portfolios An order to buy or sell a security at the
of basic asset classes and/or current market price. mean
commodities. Components of A central value of a set of numbers. Or,
managed products could include market ratios the sum of the values divided by the
segregated funds, hedge funds, See Value Ratios. number of values. Also known as the
commodity pools, closed-end funds average.
and principal protected notes (PPN).
market review
A section of mutual fund financial microeconomics
management expense ratio (MER)
statements where the fund manager Refers to how the individual is affected
A calculation that is required under explains what has happened to rates, by changes in prices or income levels.
National Instrument 81-102. It allows and therefore the performance, of the
investors to compare the level of fund over the recent past, and why. minimum investment
management fees and expenses from The fund manager also provides a An investor exemption from receiving
one fund to another. It includes both forecast or outlook for the fund over a prospectus based on a prescribed
management fees as well as fund the next few months. minimum investment. NI 45-106
expenses.
sets the minimum across Canada
market risk at $150,000.
management fees
Refers to the risk of fluctuations in
These fees are charged by all mutual the market as a whole — if the stock momentum investing
funds and are deducted from the fund market is in a slump, this will influence A form of equity investing where
itself to pay the fund managers or a fund that invests in stocks. Even a proponents believe that strong gains
investment advisory services. highly diversified mutual fund has in earnings or stock price will translate
market risk. into stronger gains in earnings or stock
margin
price.
The amount that an investor is market sentiment
required to leave on deposit when The overall attitude of investors monetary aggregates
using borrowed funds to purchase toward a particular stock or the stock An aggregate that measures the
securities. The margin is usually a market in general. quantity of money held by a country’s
fixed percentage of the value of the
households, firms, and governments.
securities.
market timing It includes various forms of money
The act of shifting from one class of or payment instruments grouped
margin account
security to another (e.g. from bonds to according to their degree of liquidity.
An account that uses money borrowed stocks) based on expectations of where
from a stockbroker to buy securities. the economy or the markets may be monetary policy
heading. The regulation, by a Government, of
marginal tax rate
the money supply and available credit
Refers to the rate of tax to be paid on marketable government bond for the purpose of promoting sustained
the next dollar of income earned from Bonds for which there is a ready economic growth and price stability.
any source. market (i.e., clients will buy them
because the prices and features are
attractive).

money laundering Mutual Fund Dealers Association net profit margin

The fact of accepting cash (or assets) (MFDA) A profitability ratio that indicates how
obtained illegally and making it appear The Self-Regulatory Organization efficiently the company is managed
legitimate. It is a criminal offence (SRO) that regulates the distribution after taking into account both
punishable under Canada’s Criminal (dealer) side of the mutual fund expenses and taxes.
Code. industry in Canada.
net worth
money market funds mutual fund sales representative Whatever an individual has
These are considered to be the lowest Individuals who are licenced to sell accumulated to date is his net worth.
risk of all mutual fund investments. and provide advice on mutual funds It is the difference between the total
The fund invests in money market products to their clients in the province assets and the total liabilities of an
securities, such as T-Bills and or territory where they have been individual — what is owned less what
commercial paper. licenced. is owed.
money purchase plan New Account Application Form

A type of Registered Pension Plan; (NAAF)
also called a Defined Contribution N A form that is filled out by the client
Plan. In this type of plan, the annual at the opening of an account. It gives
payout is based on the contributions National Instrument 81-101 relevant information to make suitable
to the plan and the amounts those A law adopted by the Canadian investment recommendations.
contributions have earned over the Securities Administrators (CSA) and The NAAF must be completed and
years preceding retirement. In other followed throughout the country. It approved before any trades are put
words, the benefits are not known but specifies the required structure and through on an account.
the contributions are. content of the mutual fund simplified
prospectus. no-load funds
money supply This type of fund charges no sales
The total amount of money available National Instrument 81-102 fee and is predominately offered by
in an economy at a specific time. A law adopted by the Canadian subsidiaries of financial institutions.
Securities Administrators (CSA) and
mortgage followed throughout the country. It is nominal GDP
Essentially includes an obligation a wide-ranging set of rules that deals The dollar value of all goods and
by the mortgagor to pay stipulated with all aspects of the creation and services produced in a given year at
amounts on a debt that is secured by management of mutual funds. prices that prevailed in that same year.
a pledge of property.
National Registration Database nominal interest rate
mortgage fund Database for registration of The quoted or stated rate on an
Consists of a diversified portfolio of applications for mutual fund investment or a loan. This rate allows
residential and some commercial salespeople. for comparisons but does not take into
mortgages. Some mortgage funds limit account the effects of inflation.
mortgages held to those insured under natural resource funds
the National Housing Act (NHA). A type of specialized fund that nominal return
Default risk is lowered still by the fact invests in the securities of companies The return on an investment that has
that mortgages that are in default will engaged in natural resource industries. not been adjusted for inflation. In the
often be purchased by the investment Examples of such industries include case of a bond it is simply the coupon
company’s parent firm (i.e. the bank mining, oil and gas, and forest rate.
that booked the mortgage). products.
nominee account
mutual fund natural unemployment rate An account registered in the name of
An unlimited number of units are Also called the full employment a dealer or third-party administrator
issued by the fund and they are bought unemployment rate. At this level on behalf of the beneficial owner of
and sold directly by the fund itself. The of unemployment, the economy is the mutual fund.
value of a unit is not determined by thought to be operating at close to its
market demand but by the net asset full potential or capacity. nominee owner
value of the securities in the fund’s
A person or firm (bank, investment
portfolio.
net asset value per unit (NAVPU) or dealer, CDS) in whose name securities
net asset value per share (NAVPS) are registered. The shareholder,
It is the net assets of the fund divided however, retains the true ownership of
by the number of units outstanding. the securities.

GLOSSARY G • 15
non-conventional mortgage open-end trust over-contribution

A mortgage that exceeds 80% of the The trust structure enables the fund to An investment into an RRSP that
appraised value of the property. This avoid taxation. Any interest, dividends exceeds the allowed amount of
type of mortgage requires mortgage or capital gains income, net of fees and contribution. The over-contribution is
insurance under the “National Housing expenses, is passed on directly to the not tax deductible, and the individual
Act”. unit holders. The fund does not incur may be subject to a penalty if the over-
tax liability. contribution exceeds a cumulative
non-cumulative lifetime over-contribution limit of
A preferred dividend that does not open-market operations $2000.
accrue or accumulate if unpaid. Method through which the Bank of
Canada influences interest rates by overnight rate
non-deposit-taking institution trading securities with participants in The interest rate that is set in a
Companies, such as life insurance the money market. marketplace called the overnight
companies, that do not take deposits. market where major Canadian financial
They acquire capital by pooling the operating expenses institutions lend each other money on
premiums from policies they issue In the case of a mutual fund, it refers an overnight basis.
to individuals and then invest those to expenses that arise from the day-
premiums in capital market securities. to-day activities of the fund. Examples over-the-counter (OTC)
In this way, they provide sufficient include brokerage fees, securities filing The OTC market has no physical
funds to satisfy the claims of policy fees, audit fees and administrative location as such. It is really a large
holders. expenses. computer network through which
investment dealers negotiate
operating performance ratios transactions among themselves. Most
Ratios that illustrate how well bonds trade OTC but the shares of
O management is making use of the some small and large companies can
company’s resources. These ratios also be traded OTC.
odd lot include profitability and efficiency
A transaction in less than a board lot. measures.
option contract P
offering memorandum
A document that provides detailed A derivative security which gives the
disclosure, similar to a prospectus, holder the right, but not the obligation, par value
but that is not reviewed by any to buy or sell the underlying asset This is the face value or the stated
regulatory agency and that does not within a fixed period for a fixed price. value of a bond or a preferred share.
provide investors with the same legal Securities may trade above, below, or
remedies. option premium at their par value.
This is the price an investor pays for
Old Age Security (OAS) an option. pari passu
Pension is payable at age 65 to all A legal term meaning that all securities
Canadian citizens and legal residents organized exchange within a series have equal rank or
including landed immigrants and those The location (either physical or claim on earnings and assets. Usually
with visitors’ permits. electronic) where buyers and sellers of refers to equally ranking issues of a
securities are systematically matched. company’s preferred shares.
open mortgage
A type of mortgage that, at any output gap participation rate
time before the end of the term, The difference between real GDP The share of the working-age
can be repaid by the mortgagor (the (actual production) and potential population in the labour force.
borrower) without penalty. GDP (what the economy is capable The participation rate shows the
of producing). Economists use the willingness of people to enter the
open-end mutual fund (open-end output gap as an indicator to measure workforce and take jobs.
fund) inflationary pressures.
See Mutual Fund.
overconfidence
Unwarranted faith in one’s intuitive
reasoning, judgments, and cognitive
abilities.

passive portfolio management performance averaging formulas Pooled Registered Pension Plan
An investment management style The method by which a PPN’s final (PRPP)
employed by managers who believe payoff is based not on the value of A type of retirement savings plan
that financial markets are efficient the underlying asset at maturity, but offered by the federal government.
(that is, all available information is on some average performance of the The plan is designed to address
reflected in the price of a security) underlying asset over the life of the the gap in employer pension plan
and therefore present no opportunity note. coverage by providing Canadians with
to earn significant excess returns. an accessible, large-scale, low-cost
Proponents of this approach will seek performance participation cap pension plan.
to match the performance of a market A principal protected note with
segment or index by mimicking its a performance participation cap portfolio allocation service
risk and return characteristics. Unlike promises to pay the return earned A type of fund wrap where the client
active managers, passive managers do by some particular asset up to a owns units of several mutual funds in
not try to add value through strategies maximum amount. the proportions established through
such as market timing and individual the allocation service.
security selection. performance universe
A large number of other mutual funds portfolio asset allocation
Payments Canada with similar characteristics against This refers to the selection of the
An organization that establishes, which a mutual fund can be compared. classes of securities to be held the
operates, and maintains systems proportions of equities, debt securities,
for the clearing and settlement of personal circumstances and money market securities.
payments among member financial
These include clients’ age, whether
institutions on behalf of their portfolio funds
they are single or married, how many
clients—individuals, businesses, and
children they have, and what kind of Mutual funds that invest in other funds
governments.
lifestyle they wish to maintain. They instead of buying securities directly.
have a major impact on the ability of
peer group the investor to bear risk and on the portfolio investment objectives
A group of managed products financial goals selected. Are most often presented in terms of
(particularly mutual funds) with a
the types of return that the portfolio
similar investment mandate. personal data should generate and, indirectly, the
The personal information of a person level of risk that will be assumed in
perfect negative correlation that may include age, marital status, order to earn those returns.
The patterns of returns of different number of dependants, risk tolerance
classes of securities are mirror images and health and employment status. portfolio manager
of each other, with the peaks of one
A professional investor who selects the
security corresponding with the Personal Information Protection and securities that belong to the portfolio.
troughs of the other. Electronic Documents Act (PIPEDA)
The Act that provides protection for potential GDP
perfect positive correlation personal information and grants legal The goods and services an economy
The patterns of returns of different status to electronic documents. is capable of producing when its
classes of securities match each
existing inputs of labour, capital, and
other, with the peaks of one security Phillips curve technology are fully employed at their
corresponding with the peaks of the
A graph showing the relationship normal levels of use.
other.
between inflation and unemployment.
The theory states that unemployment pre-authorized contribution plan
performance assessment can be reduced in the short run by (PAC)
The process of comparing a mutual increasing the price level (inflation) Automatic purchase plans or
fund manager’s results with those of at a faster rate. Conversely, inflation contributions, where investors can
an established and reliable benchmark can be lowered at the cost of possibly purchase units in regular installments
to determine if there has been a increased unemployment and slower throughout the year.
comparatively “good” return on economic growth.
investment.
pre-authorized investment plan
policy statements See Voluntary Accumulation Plan.
Clarify the position of the securities
commissions on various issues. They precious metals funds
may be issued as national policies and
Specialized mutual funds that focus on
instruments, provincial policies, or
securities related to precious metals,
uniform policies, e.g. NI 81-101.
such as gold and silver.

GLOSSARY G • 17
preferred dividend funds Privacy Commissioner prospectus

A type of fixed income fund that The federal law establishes a Privacy A legal document which must
holds primarily dividend paying Commissioner as an oversight accompany all new security issues.
preferred shares and possibly common mechanism. Consumers have the It primarily outlines the financial
shares. Preferred dividend funds are right to file a complaint about any condition of the issuer, the use to
distinguished from dividend funds by aspect of compliance with PIPEDA. which the funds raised will be put, and
the fact that they tend to hold mostly Clients are entitled to file a complaint the risk associated with the securities.
preferred shares. against a financial institution’s
apparent breach of compliance with purchase price per unit
preferred shares the measures adopted in the federal The total cost per unit an investor pays
Preferred shareholders will receive law for the protection of their personal including any acquisition fees. It is
a fixed dividend before common information. The Commissioner is calculated by dividing the NAVPU by 1
shareholders. They are granted empowered to receive complaints; minus the acquisition fee percentage.
voting rights only under special conduct investigations; attempt to
circumstances, and will receive a resolve complaints; and audit the purchasing power
predetermined dollar amount (par personal information management
It is the ability of a dollar to buy goods
value) should the company dissolve. practices of an organization.
and services. As purchasing power
decreases, an individual is able to
premium private placement purchase fewer goods and services for
The price of a fund is above the net The underwriting of a security and the same amount of money.
asset value. its sale to a few buyers, usually
institutional, in large amounts.
price-earnings ratio (P/E)
A shareholder ratio that shows how probate Q
much investors are willing to pay for A provincial fee charged for
the current earnings of a firm and authenticating a will. The fee charged
quartile (quartile rankings)
what they believe the firm’s growth is usually based on the value of the
assets in an estate rather than the A ranking system that shows how well
prospects are. It is calculated by an individual security or mutual fund
dividing the current price per common effort to process the will.
has performed compared to its peers.
share by the current EPS. A first quartile ranking implies that the
professional management
fund’s performance is in the top 25%,
primary market The fundamental service offered by or equivalently, that it outperformed
This is the market for newly issued and mutual funds. It is the role of highly 75% of its peers. A second quartile
underwritten securities that have never qualified portfolio managers to select ranking implies that the fund’s return
been offered to the public. investments that are likely to generate is between 25% and 50% of the
returns that reach certain performance top performing funds. Funds within
principal protected note (PPN) targets. these two quartiles are deemed to be
A debt instrument. It has a maturity outperforming their peers. The bottom
date upon which the issuer agrees professional responsibility quartile, then, would include funds
to repay investors their principal. In The responsibility of the investment that are under-performing relative
addition to the principal, PPNs provide guide to provide the best client service to their peers. It has been found to
interest paid either at maturity or as possible and to refuse to sell a product be highly unlikely that a fund will
regular payments linked to the positive that is felt to be unsuitable. consistently remain in the top quartile
performance of the underlying PPN over extended time periods.
asset. The underlying assets can be profit
common stocks, mutual funds, stock That part of a company’s revenue Québec Pension Plan (QPP)
indices, commodities, or hedge funds. remaining after all expenses and taxes A mandatory contributory pension
have been paid and out of which plan designed to provide monthly
dividends may be paid. retirement, disability, and survivor
benefits for all Quebec residents.
prohibited practices Employers and employees make equal
Practices that are illegal or otherwise contributions.
unacceptable to securities regulators.

quick ratio redemption fee registrar

A more stringent measure of liquidity See Back-End Load. Usually a trust company appointed by
compared with the current ratio. a company to monitor the issuing of
Calculated as current assets less referral arrangement common or preferred shares. When
inventory divided by current liabilities. An arrangement where a member is a transaction occurs, the registrar
By excluding inventory, the ratio paid (or pays) a fee, including fees receives both the old cancelled
focuses on the company’s more liquid based on commissions (or sharing a certificate and the new certificate from
assets. commission), for the referral of a client the transfer agent and records and
to or from another person. signs the new certificate. The registrar
is, in effect, an auditor checking on the
Registered Education Saving Plan accuracy of the work of the transfer
R (RESP) agent, although in most cases the
registrar and transfer agent are the
A type of tax deferred savings plan that
same trust company.
ratio analysis allows usually parents or grandparents
A method of using various ratios to to save for a child’s education. Unlike
RRSP contributions, annual RESP registration
evaluate financial statements.
contributions are not tax deductible. Everyone who sells securities, or
counsels and advises investors, must
ratio withdrawal plan
Registered Pension Plan (RPP) be registered with the appropriate
A systematic withdrawal plan that provincial or territorial securities
allows mutual fund investors to A trust registered with Canada
administrator. This is to monitor the
regularly receive a fixed percentage Revenue Agency and established
competence and ethical behavior
of the fund value. If the ratio exceeds by an employer to provide pension
of people involved in the selling of
the total of income and capital benefits for employees when they
securities.
appreciation, capital erosion will result. retire. Both employer and employee
may contribute to the plan and
contributions are tax-deductible. regret aversion
real GDP
People who are subject to regret
The dollar value of all goods and aversion bias avoid making decisions
services produced in a given year Registered Retirement Income
Fund (RRIF) because they fear, in hindsight, that
valued at prices that prevailed in some whatever they decide to do will result
base year. An RRSP termination option that
in a bad decision.
allows the investor to retain the same
real estate market investments as were held in the RRSP.
A RRIF requires minimum annual regular dividend
This is the market for commercial or A term that indicates the amount a
residential properties. withdrawals which must begin by
the end of the second calendar year company usually pays on an annual
following the plan’s initiation. Like basis.
real interest rate
RRSPs, RRIFs are transferable between
The nominal rate of interest minus the financial institutions and an investor regulators
percentage change in the Consumer may have more than one. It is the role of regulators to define the
Price Index (i.e., the rate of inflation). limits of activity for the participants in
Registered Retirement Savings the financial system and to ensure that
real rate of return Plan (RRSP) financial market transactions are fair
This refers to the return on an Allows contributors to save some and in compliance with regulations.
investment over a given period after of their annual earned income, up
adjusting for inflation for the same to allowable limits, while deferring regulatory bodies
period. income taxes on the contributions. Provincial and territorial securities
Any earnings held within the plan administrators that are responsible for
record keeping are sheltered from taxes but, upon the administration of the provincial
The act of keeping and maintaining withdrawal, are taxed as regular securities acts.
accurate financial records. income regardless of their source
(e.g., dividends, capital gains or relative value strategies
redemption interest). Hedge fund strategies that attempt
A feature that allows the issuing to profit by exploiting inefficiencies
corporation to redeem, or pay back, or differences in the pricing of related
the bondholders before the stated stocks, bonds, or derivatives in
maturity date. Also known as a call different markets.
feature.

GLOSSARY G • 19
Representativeness bias right of redemption

S
An internal system for classifying A mutual fund’s shareholders have
objects and thoughts. a continuing right to withdraw their
investment in the fund simply by sacrifice ratio
reset option submitting their shares to the fund Describes the extent to which Gross
Allows the contract holder to protect itself and receiving in return the dollar Domestic Product must be reduced
profits inside the segregated fund. amount of their net asset value. This with increased unemployment to
characteristic is the hallmark of mutual achieve a 1% decrease in the inflation
funds. Payment for the securities that rate.
retail investors
have been redeemed must be made
Individual investors who buy and
by the fund within three business days safety of capital
sell securities for their own personal
from the determination of the net An investment that is not likely to
accounts, and not for another
asset value. erode the capital of the investor will
company or organization. They
generally buy in smaller quantities provide safety of capital. A money
than larger institutional investors. risk market mutual fund, for example, will
See Volatility. satisfy this investment objective.
retained earnings
risk analysis ratios sales charges
Net income that is not paid out in the
form of dividends but kept by the firm Ratios that show how well the A type of explicit cost paid to mutual
usually to finance growth. company can deal with its debt fund sales representatives and financial
obligations. advisors who recommend a company’s
funds to their clients.
retract
A feature which can be included in a risk averse
Descriptive term used for an investor sales commission
new debt or preferred issue, granting
the holder the option under specified unable or unwilling to accept the See Load.
conditions to redeem the security on probability or chance of losing capital.
a stated date – prior to maturity in the savings
case of a bond. risk capacity The amount of money not needed for
A client’s ability to endure a potential current expenditures.
return financial loss.
The return or yield on a security seasonal unemployment
includes any change in the value of the risk profile Occurs as a result of industries where
security over the holding period plus A description of the type of risk workers are not needed in certain parts
any cash flows (e.g. interest, dividends) associated with a particular of the year due to the seasonal nature
received, all divided by the original investment. Also refers to a of the industry.
price. combination of a client’s risk tolerance
and risk capacity. secondary market
return on common equity (ROE) This is the market for securities that
ratio risk tolerance have previously been sold by the
An operating performance ratio that The financial and psychological issuer. When an investor purchases a
indicates management’s effectiveness readiness of an individual to bear the security through a broker, this is said to
in maintaining or increasing day to day fluctuations in the value be a secondary market transaction.
profitability in relation to the of their investments. People who are
company’s common equity capital. unable to tolerate risk are said to be second-order risks
risk averse. Those who like to take risks Risks that are not related to the
returns-based style analysis are risk tolerant. market, but to other aspects of
Comparing the fund’s returns trading, such as dealing, implementing
(usually 36 to 60 months of data) to risk-adjusted rate of return arbitrage structures, or pricing illiquid
the returns of a number of selected The rate of return that is adjusted or infrequently valued securities.
passive style indices. for risk to be able to compare the Second-order risks include liquidity,
performance of two securities on the leverage, deal-break, default,
reward-to-risk ratio same basis. counterparty, trading, concentration,
Provides an indication of how pricing model, security-specific and
successful a fund is at earning a return trading model risks.
given the level of risk it assumes
to earn that return. It is calculated
by dividing the fund’s return by its
standard deviation of returns.

sector rotation segregated fund short selling

A type of equity investing philosophy Essentially, the life insurance industry’s This occurs when an investor sells a
that is based on the belief that equivalent of a mutual fund. These security that he does not own. This
different industries will perform well pooled investments are sometimes transaction is undertaken in order to
during certain stages of the economic called variable deferred annuities and, benefit from a fall in the price of the
cycle. like mutual funds, investors purchase security.
an interest in these funds based on
sector trading their net asset value. Unlike mutual short-term bond fund
A fixed-income philosophy for bonds funds, the value of these investments A type of fixed-income fund that
that involves varying the weights of is often guaranteed. combines the characteristics of a bond
different types of bonds held within a fund and a money market fund. This
portfolio. Self-Regulatory Organizations fund invests primarily in government
(SROs) bonds with maturities of up to five
sector weighting Associations that regulate the years (though mostly less than three
The selection of the specific industries companies and the employees within years) and money market securities.
from which stocks in a portfolio will be a specific industry. For example, the
chosen. Mutual Fund Dealers Association simple rate of return
(MFDA) is the mutual fund industry’s It is the return earned by an
secured bond SRO for the distribution side of the investment over a given period
mutual fund industry. without considering the effects
Bonds that include a promise to turn
over an asset to the bondholders for of compounding. Simple rates are
liquidation if the corporation fails to serial bond useful for looking at the consistency
make its coupon payments or pay the A bond or debenture issue in which a of returns.
par value at maturity. predetermined amount of principal
matures each year. simplified prospectus
securities For mutual funds, provides all of the
Paper certificates or electronic records service fee information required under National
that evidence ownership of equity See Trailer Fee. Instrument 81-101 (risk factors of the
(stocks) or debt obligations (bonds). fund, method of distribution, fees,
set-up fee investment objectives etc.).
securities administrator A one-time fee that is charged by some
A general term referring to the mutual funds the first time an investor small cap funds
provincial regulatory authority (e.g., purchases units. Small capitalization funds, which
Securities Commission or Provincial means that the market value of the
Registrar) responsible for administering seven-day yield equity of the firm is relatively low,
a provincial Securities Act. Calculated by dividing the ending net probably because the firm is small.
asset value by the fund’s initial net
securities commission asset value and then subtracting 1. soft landing
See Securities Administrator. A business cycle phase when economic
shareholder growth slows sharply but does not
security A person who purchases a stock is turn negative, while inflation falls or
a shareholder of the company that remains low.
Paper certificates or electronic records
that evidence ownership of equity issued the stock.
(stocks) or debt obligations (bonds). soft retraction
shareholders’ equity A type of retractable preferred share
security analysis Also known as net worth, this is what where the redemption value may be
is left when liabilities are subtracted paid in cash or in common shares,
Refers to the evaluation of risk and
from assets. generally at the election of the issuer.
return characteristics of securities.
Sharpe ratio sophisticated investor

security selection
Similar to the reward-to-risk ratio, but See Accredited Investor.
A fixed-income philosophy for bonds
that involves fundamental and credit it subtracts the T-bill rate from the
analysis and quantitative valuation return before calculating the ratio. source of capital
techniques at the individual security The only source of capital is savings.
level. shelf registration Capital comes from retail, institutional,
Registration of only a simplified and foreign investors.
prospectus for new issues.

GLOSSARY G • 21
specialty mutual funds statement of comprehensive income style drift

A category of funds that specialize in A financial statement which shows a Changes in a manager’s investment
a particular industry (sector fund) or a company’s revenues and expenditures style over a period of time.
distinctive type of security. These funds resulting in either a profit or a loss
offer a lower level of diversification during a financial period. suitability
than other mutual funds and may A registrant’s major concern in making
therefore be somewhat riskier. statement of financial position investment recommendations.
A financial statement showing a All information about a client and
speculator company’s assets, liabilities and equity a security must be analyzed to
An investor who seeks out higher risk on a given date. determine if an investment is suitable
funds and investments that offer the for the client in accounts where a
possibility of high returns. statement of investment objectives suitability exemption does not apply.
Mutual funds must set investment
spousal RRSP objectives and clearly state the types supply
This type of plan allows a couple of investments that the fund will make The quantity of a good or service that
to divide the ultimate retirement in order to attain them. producers are willing to supply at a
income between them. See Registered particular price during a given time
Retirement Savings Plan (RRSP). status quo period.
The predisposition of people, when
stability faced with a wide variety of options, to survivorship bias
The opposite of volatility. Stability choose to keep things the same. A form of bias that affects comparison
refers to the amount of change in universes. As defunct portfolios drop
an investment over time. A stable stock out, they are excluded from rankings
investment is a safe investment. Also called a share or equity. A stock in subsequent quarters; therefore, a
represents an ownership interest in performance universe is a universe of
standard deviation corporations. Typically, stocks do survivors.
A common measure of volatility in not have a stated maturity date and
investment returns. It shows how therefore fit within the definition of a System for Electronic Document
spread out the returns are with respect longer‑term security. Analysis and Retrieval (SEDAR)
to the average (mean) return. The A web site containing all Canadian
higher the standard deviation, the stock exchange mutual fund documents including the
riskier the investment. A marketplace where buyers and simplified prospectus, annual reports,
sellers of securities meet to trade and and annual information forms.
standard equity funds where prices are established according
A mutual fund composed of Canadian to supply and demand. systematic risk
common stocks that seeks to earn The risk associated with mutual fund
some combination of dividend income strategic asset allocation shares or units that can suffer in falling
and capital gains. An investor’s mix of specific mutual markets where unit values are subject
funds or asset classes consistent with to market swings.
standard trading unit the investor’s characteristics. The mix
A fixed number of shares that is determined mathematically based systematic withdrawal plan
constitute a trading unit. The common on capital market expectations. Allows a mutual fund investor to
size is 100 shares, but it may be as automatically redeem units on a
large as 1000 shares depending on the structural unemployment regular basis. This type of plan is
stock exchange and the stock price. A form of unemployment resulting of benefit to investors who require
from a mismatch between demand cash payouts on which to live or to
standards of conduct in the labour market and the skills supplement their income.
The code of conduct that mutual fund and locations of the workers seeking
sales representatives should apply in employment.
their relationships with clients.
style analysis
statement of changes in equity The study of style drift (change in a
A financial statement that shows the manager’s investment style over a
total comprehensive income kept in period of time) in a fund’s holdings or
the business year after year. returns over time.

time-weighted maturity Treasury bill (T-bill)

T
See Duration. A T-Bill is a short-term debt security
issued by the government. T-Bills do
T3 Form time weighted return (TWR) not pay interest, instead they are sold
Referred to as a Statement of Trust Also known as the geometric mean at a discount and are redeemed for
Income Allocations and Designations. return, it involves adding 1 to each of their par value at maturity.
When a mutual fund is held outside the observed annual returns, finding
a registered plan, unitholders of an the nth root of their product (where n trend ratios
unincorporated fund is sent a T3 form is the number of annual returns), and Constructed by selecting a base period
by the respective fund. finally subtracting 1. (usually treating the ratio for that
period as 100) and then dividing the
T5 Form total assets base period into subsequent periods.
Referred to as a Statement of Includes the estimated market Trend ratios are useful for spotting
Investment Income. When a mutual value of real estate, the value of all trends and making comparisons
fund is held outside a registered plan, investments, and the value of all other between companies.
shareholders are sent a T3 form by the assets held by the client.
respective fund. trust deed
total liabilities This is the formal document that
target-date funds outlines the agreement between the
Calculated by adding up the
A mutual fund that adjusts its asset outstanding amount on mortgages and bond issuer and the bondholders. It
mix to move from riskier to more loans, as well as unpaid bills. outlines such things as the coupon
conservative as the maturity date of rate, if interest is paid semi-annually
the fund approaches. and when, and any other terms and
tracking error
conditions between both parties.
The degree to which ETFs fails to
Tax-Free Savings Account (TFSA)
mirror the index returns.
A Government sponsored saving plan trustee
where investment income earned in For bondholders, usually a trust
trading costs
the TFSA is tax free. company appointed by the company to
The amount of brokerage fees and
protect the security behind the bonds
commissions paid to buy and sell
technical analysis and to make certain that all covenants
securities within a mutual fund.
Security analysis that is based on of the trust deed relating to the bonds
the premise that the only things that are honoured. For a segregated fund,
trailer fee
affects stock prices are supply and the trustee administers the assets of a
Is paid by mutual funds to compensate mutual fund on behalf of the investors.
demand. This type of analysis may also
distributors for providing ongoing
involve looking for buy or sell signals
services to the mutual fund’s clients. trustee fee
by examining price movements or
These fees are not borne by the fund’s
volume movements in stock charts. Is charged to investors who hold
investors but by the investment
mutual fund investments as
company that manages the fund.
term stand-alone RRSP, RRIF, and RESP
The period during which a particular investments.
trailing commission
rate of interest on a mortgage stays in
See Trailer Fee. trustworthiness
effect.
The trait of deserving trust and
transfer agent
term to maturity confidence.
Is responsible for maintaining records
The time between the issuance of a
of who owns the mutual fund’s units. turnover rate
fixed income security and its maturity
This function is usually performed by a
date, at which the issuer will pay back The proportion of a total fund’s assets
trust company.
the principal. traded in a year.
transfer fee
termination
Is charged when a mutual fund
Leaving the employer and transferring
investor wishes to switch investments
internally within the company to
out of one fund and into another fund
another province.
with the same mutual fund company.
terrorist financing
Terrorist financing (proceeds for crime)
provides funds for terrorist activity.

GLOSSARY G • 23
variable annuity
U Y
An annuity where payments to the
annuitant will fluctuate in keeping with
underwriting the changes in the value of the mutual yield
Occurs when a new issue is purchased fund from which payments are made. See Current Yield and Effective Yield.
by an investment dealer and the dealer
bears the risk that the issue will be sold variance yield curve
at the desired price. In a best efforts Measures the extent to which the A graph showing the relationship
underwriting, the dealer does not possible returns on a security differ between yields of bonds of the same
assume the risk of guaranteeing that from the expected return. quality but different maturities. A
all or any part of an issue will be sold. normal yield curve is upward sloping
vested depicting the fact that short-term
unemployment rate money usually has a lower yield than
The accumulated contributions in an
A measure of the prevalence of employer-sponsored pension plan longer-term funds. When short-term
unemployment. It is calculated as a belong to the employee. funds are more expensive than longer
percentage by dividing the number term funds the yield curve is said to be
of unemployed individuals by all inverted.
volatility
individuals currently in the labor force.
Volatility measures the periodic
yield to maturity
change in returns in relation to the
unique risk Shows the return expected over the
average or mean return — the greater
The risk that a particular firm or the change, the more volatile the life of a bond assuming the periodic
industry will do poorly, regardless investment. A volatile investment is a coupon payments are reinvested at the
of the performance of the market risky investment. yield to maturity. It takes into account
as a whole. This type of risk can be the current market price of a bond, the
eliminated through diversification. time remaining to maturity, the par
voluntary accumulation plan
value, and the coupon rate.
Allows the mutual fund investor to
unsolicited orders
specify the amount and timing of the
Orders for mutual funds that have not regular investments they are willing to
been recommended by the salesperson make.
but instead come from the clients.
users of capital
Individuals, companies, and W
governments that levy money by
borrowing or issuing shares (companies
only) for a number of reasons. wealth
This is measured by the value of an
investor’s savings, investments, and
assets. When their value grows at a
rate that exceeds the inflation rate,
V
wealth increases.
value investing whipsaws

An equity investment philosophy that Rapid intraday or interday price swings
promotes a conservative approach to in the market that may result in many
money management. Value investors short-term trading losses.
want to buy a firm for less than what
the assets in place are worth.
working capital
A company’s total current assets minus
value ratios
its current liabilities.
Ratios that show the investor what
the company’s shares are worth, or the
working capital ratio
return on owning them.
See Current Ratio.
variability
The amount of change in returns of an
investment over a period of time.

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Glossary

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assets under management (AUM) bearer bond

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board of directors call premium capital growth

capital and financial account cash flow

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Chambre de la sécurité financière collateral consumer price index (CPI)

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correlation current assets death benefits

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default risk depreciation disinflation

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dual employment effective yield enforcement

duty of care efficient market equilibrium price

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ethical responsibility explicit costs financial intermediaries

event-driven strategies fairness financial planner

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fiscal year foreign exchange risk fund of funds

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government bond guaranteed minimum withdrawal holdings-based style analysis

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insider interest rates investment horizon

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market material fact

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money laundering Mutual Fund Dealers Association net profit margin

money purchase plan New Account Application Form

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non-conventional mortgage open-end trust over-contribution

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preferred dividend funds Privacy Commissioner prospectus

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quick ratio redemption fee registrar

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Representativeness bias right of redemption

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sector rotation segregated fund short selling

Sharpe ratio sophisticated investor

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specialty mutual funds statement of comprehensive income style drift

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time-weighted maturity Treasury bill (T-bill)

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value investing whipsaws

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