Financial Terms Glossary

Have you noticed that in the investment industry there are so many acronyms and terms you have never heard of? We would like to de-mystify our business! So we have included a glossary of some of these terms in this eNewsletter. Let’s start with these ten!

Exchange Traded Funds (ETFs)

Exchange traded funds (ETF) are securities that track other assets or indexes, meaning that they own underlying assets such as stocks or bonds, and divide ownership into units. ETF unit holders are entitled to profits such as interest or dividends, and their value can appreciate over time. Though they are pooled funds, they trade like a common stock on a stock exchange.  That means the can be bought and sold throughout the day, thereby offering liquidity and diversity. They generally have lower fees than mutual funds.

Principal Protected Notes (PPNs)

Principal protected notes (PPN) are structured notes that guarantee the investor’s initial investment, and offer growth or income based on the performance of the underlying assets. PPNs are ideal for investors wishing to help protect their investments while participating in market movement.  Investors must hold PPNs until maturity in order to receive the full payout.  This means that investors’ money will be tied up for longer periods of time, and early withdrawals may be subject to withdrawal charges.

Principal At-risk Notes (PARs)

Principal At Risk Notes (PARs) are a type of structured note that can provide more growth or income than a PPN, but with risk to the initial investment, hence their name. PAR notes often have additional features, such as limited capital protection or accelerated returns, and like PPNs must be held until maturity in order to receive the full benefit of the note. Other restrictions may apply, such as an upside cap.

Mutual Funds

A Mutual fund is a pooled investment composed of stocks, bonds, and similar assets. They are operated by managers who invest the fund’s capital to try to produce capital gains and income for the fund’s investors. Mutual funds provide a way for investors to access the stock market and the potential and diversity of a wide range of financial products with a relatively smaller amount to invest.  There are many different kinds of mutual funds, with different investment styles, asset mixes and geographic allocations.

Preferred Shares

Preferred shares are fixed income securities issued by companies that pay dividends to shareholders.  Preferred shareholders get paid before common stock dividends are issued.  They are also entitled to be paid ahead of common stock holders in the event the company goes bankrupt. Preferred stock shareholders do not hold any voting rights.

Common Stock

Common stockholders own a portion of a company, and are usually given voting rights.  Stockholders partake in the profits of a company both via dividends and capital appreciation, if the value of the shares increase. There is more risk in holding the common stock of a company, but there is also potential for greater returns than holding preferred shares.

Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) are trusts that own, operate, or finance real estate. REITs often trade on major exchanges like other securities and offer an opportunity to take part in real-estate investing. The REIT income comes from a variety of income-producing real estate, from residential housing to shopping malls to office buildings, and often specialize in a specific sector, such as healthcare.

Bonds

Bonds are debt securities where the issuer – the company or government that is borrowing – owes the bond holder. They pay interest until the maturity date at which point the capital amount would be repaid. Interest is usually payable in semi-annual intervals. Bonds are typically liquid and can be traded on the secondary market.

The primary difference between stocks and bonds is that stockholders are owners and bondholders are considered as lenders. Bondholders have priority and will be repaid in advance of stockholders in the case of bankruptcy. Furthermore, bonds have a maturity date, whereas stocks remain outstanding indefinitely.

Guaranteed Investment Certificates (GICs)

Guaranteed Investment Certificates (GICs) are Canadian investments, offered by trust companies or banks, that provide a guaranteed interest rate of return over a fixed period of time. Because the invested amount and the interest on GICs are fully guaranteed, they are considered a safe investment.  The Canada Deposit Insurance Corporation (CDIC) guarantees the repayment of interest and capital in the unlikely event of bankruptcy of the financial institution up to the amount of $100,000 per person per institution (check CDIC.ca for more details).

Guaranteed Life Annuities

Life Annuities are financial products that pay out a fixed amount of income.  Regardless of what happens to the stock markets, and/or interest rates, the Life Annuity will continue to pay out a fixed amount, making the Annuity a reliable means of securing a steady cash flow.  Life Annuities are offered through Life Insurance companies, and they can not be changed once started.  The payments will continue for the entire life of the annuitant and his/her spouse if applicable.  Guaranteeing a minimum number of payments as a way to protect the estate is always recommended.

While it is important that you are aware of some of this terminology it is even more important that you speak with your Investment Advisor.  He or she can help you through this jungle!