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Financial Terms Every Investor and Entrepreneur Needs to Know

Financial Terms Every Investor Should Know

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Getting started as an investor or entrepreneur oftentimes involves a constant learning curve. Even if you are a seasoned business owner or investor, you always need to keep learning, no matter where you are in your professional career. There’s always a new app or tool to learn, new problems to solve, and of course, new vocabulary or financial terms to understand.

To get a better understanding of what you read, we have put together a list with the most important financial terms and definitions you need to master as an investor or entrepreneur. We hope this glossary of terms and definitions will help you find your way to success as an investor, business owner or both.

A

  • Account Statement: Transaction details and their effect on account balances for a specific period of time.
  • Accumulation Plan: An agreement that allows an investor to buy mutual fund shares in smaller or larger quantities.
  • Active Investment Strategies: A strategy that involves making regular adjustments and decision to manage a portfolio. The strategy is concerned with what to buy, how to buy, and when to buy.
  • Adjusted Cost Base: The amount required to find the cost of an investment for tax purposes.
  • Adverse Market Conditions: An unsuitable period to buy or sell goods.
  • Alpha: It’s the amount by which a money manager’s performance goes beyond his or her benchmark index by a certain amount.
  • Alternative Minimum Tax: A 1986 tax reform act that focuses on collecting some tax from wealthy individuals, corporations, estates, etc.
  • Annualized: Converting short-term calculations into annual figures. Investments that offer short-term returns are converted into annual figures for a better understanding of the profit.
  • Annuity: It’s a financial product that offers fixed and continuous payments. Mainly used for retirees, they are offered by institutions that collect funds from individuals and then offer a regular stream of payments to help the individual meet day to day expenses. The annuity is paid for a specific period of time, which is known as the accumulation period. Once the accumulation period is over, the annuity begins to pay, known as the annuitization phase.
  • Appreciation: Increment in the value of a financial asset.
  • Arbitrage: The act of buying goods/assets from one market and selling it in another is called arbitrage. The aim of this practice is to gain profit from the difference in price in the two markets due to currency differences, or high/low price factor, etc.
  • Ask price: The smallest price that sellers agree to accept for a stock is called an ask price. It’s always more than the bidding price.
  • Asset Allocation: A strategized step of apportioning the portfolio into various assets such as stocks, bonds, cash, etc. Factors such as age, portfolio size, risk tolerance, and investment horizon play a vital role when allocating assets, .
  • Asset-Backed Security (ABS): A collateral taken as a form of financial security in the form of loans, credit card debts, receivables, royalties, leases, etc. It serves as an alternative for corporate debt investing.
  • Asset Class: It refers to a group of investments that are similar in nature and follow the same rules and regulations. Mainly, there are three common types of asset classes: stocks, bonds and cash equivalent. However, with changing times, real estate, futures, cryptos, and commodities also included into the mix.
  • Asset Mix: Investment of net assets in different classes of securities presented in percentage, at a specific time is called an asset mix.
  • Asset Class Performance: The expected future risk and future return from asset classes is called asset class performance. It is based on previous performance characteristics and deals in how the different classes perform relative to one another.
  • Asset Management Company: AMC is a company that looks after and manages investments made by investors.
  • Assets Under Management: When the total amount of all the investments made are managed by the funds then it is called Assets Under Management.
  • Asset Management Fee: A fee charged by agents or financial organizations for handling your assets. They are generally calculated as a percentage and change from company to company.

See Also: Investing for Beginners: Everything you Need to Know to Invest your Money Wisely

B

  • Back End Load: The fee paid by investors when they sell mutual fund shares. This fee is calculated as the percentage of the value of selling share.
  • Back Office: A part of a company run by administors and support personnels. They do not face clients but handle matters such as record maintenance, account services, IT services, clearances, and settlements.
  • Balance Sheet: A detailed sheet that contains income balance and expenditure over a period of time. It is divided into three parts: assets, liabilities (debts, etc), and shareholder equity.
  • Balanced Fund: A mutual fund in which the companies chosen are from different regions and belong to different industries. It seeks income and growth in a portfolio by mixing preferred, common stocks or bonds.
  • Bears: Investors who believe that stock prices are likely to go down. They also intend to profit from a declining market.
  • Bear Market: When stocks begin to face a drastic fall over a prolonged time, usually with a decline rate of 20% or more, then it is called a bear market. The decline grows due to the widespread pessimism, recession and spiking unemployment rate. It is the opposite of a bull market.
  • Bearish: It denotes a downward trend in stock prices.
  • Bell Charts Quartile Ranking: A way to measure a fund’s performance against mutual funds in Canada. All the funds mostly have similar investment aims.
  • Bellwether Security: A security that points the direction of a market.
  • Benchmark: It is a standard way of using an unmanaged index for comparative purposes when accessing performance.
  • Beneficiary: A person who receives advantages from an investment.
  • Beta:  It refers to measuring volatility:
    • 1 means neutral
    • More than 1 means more volatile
    • less than 1 means less volatile.
  • Blue Chip: A term used for large stocks, well established companies that have showed good performance for a long time. It is a combination of high quality and low risk investment. The term Blue Chip is borrowed from poker, where the blue chips are the most valuable.
  • Board Of Trustees: A governing body or a group of elected people who create organizational policies.
  • Bond: It is an IOU or a loan provided by an organization, US government or a municipality. The person on the collecting end promises to pay back the entire amount on a particular data along with interest, typically at regular intervals. They are often used by sovereign governments and organizations to fund projects.
  • Bond Fund: A mutual fund invested in primarily bonds is called a bond fund.
  • Bulls: Investors who believe that stock prices will go up. They are excited about the market and want to profit from it.
  • Bull Market: It’s a situation when the market is flourishing thanks to an increased number of buyers and sellers. The prices may also increase during such conditions. It is the opposite of a bear market.

C

  • Capital: Assets owned in cash is capital. The term can also refer to machineries, equipment, real estate etc. Capital can be anything that has a monetary value and can be converted into cash.
  • Capital Gain: Profit earned by selling an asset at a higher amount than it was purchased. However, a percentage of the amount is taxable based on where you live.
  • Capital Gains Long Term: The profit earned over a period of time by selling an asset at a higher amount than it was purchased.
  • Capital Gains Short Term: The profit earned in a short time period (less than a year) by selling an asset at a higher amount than it was purchased at.
  • Capital Loss: The loss sustained by selling an asset for less than its purchasing price.
  • Cash Advance: A short term loan taken from a bank or any other lender. Moreover, it also refers to the limit offered by credit cards. Cash advances can be very expensive due to high interest rates but are easy to get.
  • Capitalization: Capitalization means share price multiplied by the number of outstanding shares. In finance, it also refers to the sum of a company’s long-term debt, retained earnings, and stocks. Moreover, it has a different meaning in accounting where it refers to how the costs of acquiring an asset are expensed over a long period of time and not the period the cost was incurred.
  • Cash Equivalent: Any form of instrument that can be liquified easily into cash is referred to as cash equivalent. It can be a repurchase agreement or a treasury bill.
  • Closed-End Fund: A funding company that offers non-redeemable fix number of shares that are bought and sold in the stock exchange is called a closed-end fund. It can also be bought/sold over the counter.
  • Common Stock: A term used to represent stock ownership of an organisation with voting privileges in its affairs.
  • Contingent Deferred Sales Charge (CDSC): During the redeeming of a fund, a back end sales charge is applied as a fee. This is called contingent deferred sales charge and can decrease with time.
  • Corporate Bond: A long-term bond issued by corporations to raise outside capital.
  • Country Breakdown: Security breakdown in a portfolio on the basis of a country.
  • Custodian: An institution that keeps a customer’s asset/security in custody for security reasons.
  • Cut-Off Point: It’s the point at which an investor makes the decision to buy or not to buy a specific asset. It[s subjective and changes from person to person.

D

  • Dealer: A broker who serves as a principal in all transactions is known as a dealer.
  • Diversification: A risk management strategy that involves allocating capital into different securities or assets to minimize the risk. It follows the old age idea of not putting all your eggs in one basket.
  • Dividends: A part of a company’s profit that is paid to preferred and common shareholders. In simpler words, the sum of money paid to the shareholders by a company from its profits is called dividends. They can be be paid annually or as per the discussed terms.  
  • Dollar Cost Averaging: Investing a principal amount of money at regular intervals regardless of the share price is called dollar cost averaging. You get to have more shares when the prices are less and less shares when the prices are high. This phenomenon helps reduce the overall average cost of investing.

E

  • Earning Per Share: Earning per outstanding share of common stock over a fixed period of time is called earning per share.
  • Equities: Equity is the amount of money that’d be returned to shareholders if all company debt was paid off and assets were liquidated.
  • Equity Fund: An equity fund is a mutual fund that is principally invested in stocks. Furthermore, they are principally categorized as per the size of the company, geography, and investment style of the holdings.
  • Exchange: A marketplace that allows fair trading of commodities, securities, derivatives, etc.
  • Exchange Privilege: The transfer of money from one mutual fund to another but within the same fund family is called exchange privilege.
  • Expense Ratio: It is defined as the the ratio between the average value of net assets and a mutual fund’s operating annual expenses.
  • Extra Dividend: A special type of payment made to the shareholders by a company is called extra dividend. These are larger, non-recurring amounts paid in cash.

See Also: How Do I Start Investing in The Stock Market

F

  • Fixed income fund: A fund or portfolio where bonds are bought as investments. Moreover, there is no fixed maturity date and no guarantee of  repayment.
  • Fixed income security: A security that pays a set rate of interest along with principal payments on a regular basis. It’s a type of debt instrument that pays when it reaches maturity.
  • Fund: An investment fund refers to funds invested by a group of individuals as one. It may be handled by a person (money manager) or a financial organization.

G

  • Generally Accepted Accounting Principles (GAAP): A set of accepted accounting principles that organisations, accountants, and companies must adhere to when making financial statements. All publicly traded companies are required to comply with GAAP requirements.  
  • Group Annuity: A retirement or pension plan that gives out premium periodic payments to a group of people.  The contract is generally issued by a life insurance firm and involves tax-qualified retirement plans. Employees only own units of the fund and not entire shares.
  • Growth Investing: A strategy that helps find organisations whose earnings are expected to grow quickly and more than the average rates. It’s focused on capital appreciation and may involve investing in stocks that appear expensive in terms of price-to-earning ratios.

H

  • Hedge Fund: It’s a form of investment that uses pooled funds that employ a variety of strategies in order to achieve alpha for investors. They are typically aggressively managed but some also make use of leverage and derivatives in order to generate good returns. They are different from other investment options, such as mutual funds, as they face fewer regulations. However, they may only be available to accredited investors.
  • Historical Volatility: Fluctuations in the stock price during a certain time period.

I

  • Index Fund: A mutual fund that matches returns by tracking a particular index.
  • Interest: The extra cost that is charged for borrowing and using another party’s money. It can be paid or earned and is calculated in percentage.
  • Interest Coverage Ratio: A debt ratio that tells how easily can a company pay the interest on an outstanding debt.

See Also: How Do I Start Investing in Real Estate: A Step by Step Guide

J

  • Joint And Survivor Annuity: An insurance policy for two people (combined) that keeps offering payments for both, even if one of the parties die.
  • Junk Bond: Bonds that have a credit rating of BB (higher risk of loss) or lower are called Junk bonds. They are high yield bonds that do not require a strong credit history.

K

  • KYC (Know Your Client): A rule that asks investment advisors to learn the investment goals of an investor and appreciate their recommendations.

L

  • Last Price: The latest price on which a buyer or a seller agrees to make a transaction.
  • Late Fee: A charge that a customer has to pay to make minimum payment on the credit car when the due date has passed.
  • Leverage: An investment strategy that involves using borrowed money with one’s own cash money to finance assets. The aim is to increase the return on the total value. However, it’s a risky investment.
  • Leverage Buyout: A financial transaction that involves purchasing with a combination of debt and equity. The collateral used in this transaction is the company’s own cash flow.
  • Liability: The amount payable by individuals or companies to a creditor for past transactions. It is often used with the word payable on the balance sheet.
  • Life Annuity: A plan that pays fixed payments to the annuitant for the rest of his/her life.
  • Limit Order: An order that indicates to buy or sell an asset or security at a specified price.
  • Liquidity: The process of converting securities into cash is called liquidity. These include treasury bills, bank cheques, etc.

M

  • Management Fee: The fee paid to an investing company’s manager or advisor to supervise your portfolio and manage related operations.
  • Marginal Trading: A practice that allows users to buy more stocks by borrowing funds from a broker. The benefit of this trade is that the investor can buy a stock by paying only 30% to 50% of the transaction value.
  • Market Capitalization: The overall market value of a company expressed in dollars.
  • Market Neutral Funds: These funds help eliminate the market risk by owning 50% of the assets in short and long positions in stocks.
  • Market Price: The current price of an asset, i.e: the price at which it can be bought.
  • Market Risk: A possibility that a particular investment will not be successful and profitable. It’s present in almost all investments.
  • Market Timing: A trading strategy that involves switching between asset classes or moving in and out of a financial market.
  • Maturity: The remaining life of a debt is called maturity. For example, bond maturity is the time between the issuance of the bond and when it matures. Most assets give returns only when they have matured. Trying to cash out an asset before maturity can be costly.
  • Maturity Date: The due date of termination when a debt must be paid in full.
  • Median Market Cap: The center point of market capitalization (number of outstanding shares multiplied by market price) of the stocks in a portfolio.
  • Mid Cap: The stock market capitalization of organisations that have market values between $3 to $10 billion.
  • Money Market Mutual Fund: An investment which is aimed at protecting the principal and creating income by investing in high liquid instruments only such as treasury bills etc.
  • Mortgage: It’s a debt instrument that is secured by real estate. The borrower must pay back the amount, along with interest, as described in the contract. Mortgages are typically used by businesses and individuals to invest in real estate. They typically run for several years. The borrower does not fully own the property unless the mortgage has been cleared. They are also  called ‘liens against property’ as the lender may have the option to opt for foreclose.
  • Mortgage Backed Security: A loan which is secured by mortgages. It’s aim is to reduce the bank risk and improve liquidity.
  • Mutual Fund: A fund that involves investment made by many investors and using that pool of money to buy various assets. These assets are picked by the fund manager to make the best possible portfolio. There’s a 0.% to 2% management fee per annum on the purchased assets. A mutual fund can have investments made in stocks, real estate, bonds etc. It allows investors to invest into multiple assets which reduces the risk.

See Also: Investment Risk Management: Make More Money by Risking Less

N

  • Net Asset Value Per Share: The market value of a single share or one unit of a mutual share is called NAVPS.
  • Net Income: The profit left after deducting expenses and costs of an investment is called net income.
  • No Load Fund: A type of mutual fund that helps buy or sell shares without paying any fee.
  • Non Registered Account: An open account which is not sheltered from taxes is called a non-registered account.
  • Number Of Holdings: The number of individual securities present in a portfolio is referred to as the number of holdings.

O

  • Overweight: It is one part of the three-tiered rating phenomenon in the world of stock. The other two being underweight and equal weight. Overweight means that a particular stock offers better value for money compared to other available stocks.
  • Over The Limit Fee: A fee charged the balance goes beyond the credit limit is called over the limit fee.

P

  • Par Value: The face value of a bond that determines its maturity date is called par value.
  • Passive Investing: A mutual fund investment that tracks a market index like S&P/TSX. The benefit of this type of investment is that it requires lower portfolio management and hence the management fee is not high.
  • Payout Ratio: A portion of company’s money given to the shareholders in the form of dividends. It is the percentage amount of the company’s earnings.
  • PEG Payback: A ratio used to figure out the amount of time it would take for a company to increase (double) their money.
  • Penny Stocks: These are low priced stocks that are sold for less than $1 per share.
  • Pension Plan (Canadian): A pension plan in Canada that offers partial earnings to the contributor’s family or the contributor during retirement, disability or death. It is also called CPP.
  • Price To Earning Ratios: The amount of dollars an investor can invest in a company and expect to receive one dollar of the company’s earning. In other words, it is defined as the ratio of a company’s share price to the company’s earning per share.

Q

  • Qualified Access: This is a type of fund that prevents a certain group of investors from investing. The restrictions might be religious based, membership based, etc.
  • Quick Ratio: It is defined as the measure of a company’s liability to fulfill short term obligations using its liquid assets. In other words, it is the company’s total current assets (excluding inventories) divided by total liabilities (current).

R

  • Rebalance: To reset the asset allocation of the original mix by purchasing and selling investments.
  • Recession: A period showing an economic decline in trade or industrial activity.
  • Redemption: Redemption is when an investor’s principal is returned in a fixed income security.
  • Redemption Fee: The fee charged when an investor’s shares are sold from a fund is called a redemption fee. This fees goes into the account of the fund company and is also referred to as “exit fee”.
  • RRSP: A Canadian contract registered under the section 146 of income tax act that offers retirement payments to Canadians. The benefit of RRSP over other plans is that it grows tax-free.

S

  • Stock: An equity investment that offers partial ownership in a company is called a stock. It is a long-term investment option that gives buyers ownership but not necessarily the opportunity to make decisions for a business. It has many types.
  • Common Stock: These represent a residual ownership and are controlled by a board of directors which is why the stock holder doesn’t have a lot of control on the stock.
  • Preferred Stock: This type of stock offers priority over common stocks as it gives a fixed dividend to the stockholder. This means that preferred stock offers higher claims on assets than common stocks.
  • Stockholder: The person who owns a stock is called a stockholder. They have the right to share the company’s profitability, assets, income, to newly issued shares and voting rights as well.

T

  • Technical Analysis: An investment research that collects marketplace information to check stock price forecast by seeing the previous stock data. It analysis past prices, trades etc. It is done by reading stock price charts, looking at the volume of trades and and filtering out minor price fluctuations. This helps an investor make a good decision.
  • Transfer Fee: The fee required to pay during an internal transfer of units from one fund to another fund is called a transfer fee.
  • Tax-Exempt Income: The amount of income which is exempted from taxes is called tax-exempt income.
  • TFSA: A federal program in Canada that exempts Canadians from paying taxes on interest in specific savings account. Let’s say you open a regular savings account and one TFSA account, and add $5,000 in each at  5% interest and 28% marginal tax. After one year, let’s assume both the accounts will be worth $5,250. This means that on the regular savings account the final amount will be $5,180 due to tax on interest but in case of TFSA, which is a tax free account, you will receive the full amount of $5,25
  • Top 10 holdings: The ten biggest holdings present in a portfolio based on asset value.
  • Top 10 long and short positions: The top 10 holdings that are ranked on the basis of their market value in each position category. It involves both long and short positions. A long position involves an investor buying shares of stock to profit when the stock price rises. A short position involves an investor selling stock shares that are borrowed. The idea is to benefit when the stock declines.

Types Of Mutual Funds

  1. Canadian Equity Funds: Investing in equity securities and common stocks of Canadian companies.
  2. Canadian Resource Equity Fund: To invest in the Canadian resource center such as mining, forestry, gas stocks, etc.
  3. U.S. Equity Funds: Investing in equity securities and common stocks of US companies.
  4. North American Equity Funds: Investing in both Canadian and US companies but can hold Mexican equity securities as well.
  5. Global Equity Funds: Investing in the equity securities and common stocks of Foreign and Canadian issuers (not limited geographically).
  6. International Equity Funds: Investing in the common stocks and equity securities of foreign issuers but excluding Canadian securities.
  7. Asia-Pacific Rim Equity Funds: Investing in equity securities and common stocks with principal business in Asian pacific regions.
  8. European Equity Funds: Investing in equity securities and common stocks with principal business in European countries.
  9. Dividend Funds: Investing in the high dividend-paying shares of Canadian companies.
  10. Canadian Bonds And Income Funds: Investing in the fixed income securities of Canadian government and corporate issuers.
  11. US And International Bond & Income Funds: Investing in Canadian, foreign and US corporate securities.
  12. Mortgage Funds: Investing in commercial and residential mortgages.
  13. Canadian Balanced Funds: Investing in many Canadian bonds and stocks, however, minimum holding must be maintained for each.
  14. Asset Allocation Funds: Allocating assets in various equities such as bonds, stocks and other instruments that change as per the economic conditions. It doesn’t require any maintenance for minimum holdings.
  15. Money Market Funds: It involves short term government bonds, treasury bills, certificates of deposit, commercial papers and other assets in the Canadian market.
  16. Real Estate Trust Funds: Investing in real estate or commercial property.
  17. Specialty Funds: To invest in special markets. For example, quality metals, commodities etc.

V

  • Valuation: Estimating the worth or value of a company is called valuation. It is carried out by an analyst by monitoring the business’s management, capital structure composition, prospect of future earnings, market value of securities and assets, etc. It has a strong impact on investments as it helps determine the fair value of an asset.
  • Value Stock: The stock that is traded below the intrinsic value is called a value stock. These may include dividends, sales, earnings, etc.

W

  • Withholding Tax: This is a type of tax that is deducted at source.

Y

  • YTD Total Return: A year to date return on an investment is called YTD total return.
  • Yield: The percentage of return on capital on a yearly basis.

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Getting started as an investor or entrepreneur often times involves a constant learning curve. Even if you are a seasoned business owner or investor, you always need to keep learning, no matter where you are in your career. There’s always a new tool to learn, new problems to solve, and of course, new vocabulary to understand. To get a better understanding of what you read, we have put together a list with the most important financial terms you need to master as an investor or entreprene...
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