Glossary of Financial Terms
Glossary of Financial
With so many financial terms thrown around on TV, the news, and during everyday conversations with family and friends, personal finance can certainly become confusing and scary.
Before we delve into our finances, here is a glossary of
all the basic financial terms you will need to know:
- Investing: Known as one of the best ways to build long-term wealth; investing is more than just saving. By exchanging money for an ownership stake of a company, however small this may be, you allow this company to use your money to expand their business and have an opportunity to become more profitable. By helping them become more profitable, you get a share of the profits, which allows you to build your personal wealth.
- Shares: It is a fractional ownership of a corporation in proportion to the total number of outstanding shares that the company offers. When people talk about the stock market, they are referring to the shares that are purchased in a specific company and then held by a shareholder in the hopes of making a profit.
- Stock: A stock is a piece of a company that is publicly available to be purchased on exchanges like the Toronto Stock Exchange (TSX) or the New York Stock Exchange (NYSE).
- Bonds: A bond is like a loan that you make to a company or the government where they agree to pay you back the loan on a given date and provide an incentive for you to loan them money by paying you interest on a specific date until the loan is no longer needed.
- ETF: An ETF is an acronym for an “exchange-traded fund”. These funds have a variety of investments in them, including but not limited to stocks, bonds, mutual funds, that are selected by professionals. The benefit of an ETF is that they are low-cost, hands-off and allow you to be involved in the market.
- RESP: The registered education savings plan (RESP) is an investment account that allows you to save for your child’s education and where the government will match up to 20% of the money that you put into this account, up to an annual limit of $2,500. In this case, if you contribute the maximum amount, the government will give you $500 of free money to put towards your child’s education. Any profit that comes from the growth of this money is tax-free.
- RRSP: The registered retirement savings plan (RRSP) is an investment account where you can place money accrued over the year so that you can deduct this income from your taxes. As an example, if you make $55,000 a year and contribute $5,000, the government would tax you like someone who only makes $50,000. Please note that unlike a TFSA or RESP, you will pay taxes on all of the money you make in this account when you withdraw but the expectation is not to touch this money until retirement where you will be paying a lower tax as you will not be making a salary anymore. The RRSP also has a contribution cap of 18% of your yearly salary.
- TFSA: The tax-free savings account (TFSA) is an investment account where you are able to put after tax money and any gains made in this account are tax-free. As with the RRSP, there are caps on the yearly contribution amount and you may only open up an account once you have turned 18.
- Abnormal return: Any return that is above (abnormal profit) or below (abnormal loss) than the average expected 7-9% return on the stock market.
- Buy and Hold: A long term, passive strategy, where the investor buys and holds a stock over a long period regardless of price fluctuations.
- Active Index Funds: These are funds with higher management fees where the managers attempt to beat a specific benchmarked index by using strategies that allow them to time the market or purchase stocks that they believe will increase more than the benchmark funds.
- Passive Index Funds: These are funds with lower management fees where the managers simply attempt to match a specific benchmarked index.
- Dividend: The distribution of a portion of a company’s earnings and paid directly to the shareholders. Dividends can be paid out as cash or in the form of addition stock through a DRIP (Dividend Reinvestment Plan). Dividends are paid out monthly, quarterly, semi-annually or annually.
- DRIP: A dividend reinvestment plan is a program that allows shareholders to purchase additions shares of the stock rather than getting their dividend in cash. This avoids paying transaction fees.
- Qualified Dividend: A normal dividend that is taxed at a lower long-term capitals gain tax.
- Accrued Dividend: A normal dividend that has been earned but has not been declared or paid out by the company.
- Current Yield: The ratio between the dividend and the current price of a security.
- Annual Report: A detailed document provided by public companies that show their financial highlights, analysis, financial statements, the auditor’s report and any relevant information to shareholders.
- Annual Return: The annual return of an investment is its annual growth rate compounded with the help of a formula.
- Ask: This is the price that a trade is willing to sell his security.
- Bid: The price offered by a buyer to buy a security.
- Asset Valuation: The process for determining the value of an asset or company by using different valuation techniques.
- Bear Market: A market when the general price levels are moving downwards. A bear is someone who has pessimistic views of the market and invests in strategies that pay well when the price of the market decreases.
- Blue-Chip Stocks: These financially strong companies have been tested by their ability to pay dividends during both good and bad times.
- Delisting or Delisted: When a stock is removed from trading on an exchange because the company has gone bankrupt or is not in accordance with the listing requirements of the exchange.
- Equity: Equity is the value of any item owned by the company that does not have any outstanding debts.
- Financial Assets: Stocks and bonds are financial assets.
- Financing: When a bank or financial institutions lends money for investing or making purchases.
- Quote: Last trade price of a share.
- Quarterly Earnings Report: Report on the performance of a company that is given every 3 months.
- Fire Sale: When prices are extremely low and is considered a very good time to buy stocks.
- Growth Stocks: Stocks that are growing at a higher rate than the rest of the market.
- Income Stocks: Equity stocks that pay off steadily by increasing their dividends and offering high yields to shareholders.
- Insider trading: Trading when you have information that the is not available to the general public.
- Mergers and Acquisitions: When multiple companies consolidate to form a single company.
- P/E Ratio: A price to earnings ration is the company’s market value per share dividend by the company’s earnings per share. As an example a P/E Ratio of 8 would be that a company’s stock is trading at 8 times the value of the company’s earnings per share.
- Penny Stocks: Stocks that are very low priced and usually traded outside the major stock exchanges.
- Voting Shares: Shares that give you the right to vote on matters of company policy during the Annual Shareholders Meeting.