Capital Gains

The amount of money made from selling an asset. If I buy a stock with $1000 (of capital) and sell it for $1200, I have made $200 in capital gains. The tax on capital gains in Canada is 50% of your marginal tax rate after your normal income (see tax rate definition). If I have a 50% marginal tax rate, I would be taxed at a 50% tax on 50% of my gains and I would owe $50. The effective tax on my capital gains is 25% ($50/$200).

Depression

A long period of time where we all have to worry about our jobs and investments. Depressions last over 3 years and see a decline in our economy of over 10%. During this period of time you can expect an unstable currency, stock market crashes, and a slew of bankruptcies and a loss of innovation for many years beyond the time of the depression.

Dividend

A distribution of a profits to the shareholders of a corporation. Profits in a company should (and often are) either be used to re-invest for future growth or paid to owners. Dividends are a primary source of income to many investors and are often paid in monthly or quarterly installments. While company values and future earnings are a large part of the stock market, consistent dividend payments remain a foundation for the value of many companies – especially the banks in Canada. Dividend income is not the same as capital gains.

Economy

The wealth and resources of region or nation. An economy is a measure all the production, spending, saving, and investments.

Economic Crisis

Usually defined by “heading towards a recession” or in terrible cases, a depression.

ETF

The exchange traded fund is a single stock that investors can buy and sell on a stock market that represents a bundle of assets. The most popular ETFs are bundles of stocks representing certain sectors such as technology, or an index such as the S&P 500. The ETF can also be run as an investment fund to try and generate returns in the manner of active investing. The investor can buy this type of ETF rather than a mutual fund or a hedge fund. Robo Advisors are legally required to only own ETFs and often own a combination of both types.

Financial Advisor

Someone tasked with managing your investment portfolio. The financial advisor is an expert on standard investment options, tax structures associated with each investment option, trust services and financial planning.

Financial Stimulus

In the face of an economic crisis, financial stimulus is a government response measure meant to inject money into the economy. Quantitative Easing (Printing money).

Hedge Fund

Is a company that trades stocks to make money for it’s investors while reducing risk. The term “hedge” means to reduce or eliminate completely your risk. The element of hedge funds that make them valuable is an ability to generate returns in any economic environment. The major investors in hedge funds are larger asset managers like pension funds who need to own alternative assets that don’t go up and down in value like everything else. The best hedge fund managers in the world are well worth the money but it has been proven that the majority of them are not.

IMF

International Monetary Fund. Similar in many ways to the World Health Organization and located in Washington, DC. This organization consists of 189 countries working together to foster global financial health. Like the WHO, it has its issues. 

Index

A bundle of stocks that represents a certain demographics, sectors or types of companies. The index is provided by companies who are generally listed before the defining feature. Each index can be weighted either equally, by market cap (size of the company) or by price (stock price). S&P 500 index is a market cap weighted index provided by the company Standard and Poor 500 Index represents the 500 largest US stocks. The Dow Jones Industrial Average, was created in the late 1800s by Charles Dow and it tracks 30 large US companies listed on the New York Stock Exchange and the NASDAQ. The Nikkei 225 is a price-weighted index representing the “top” 225 companies in Japan.

Inflation

When things get more expensive. An increase in the price of goods and services that is linked with the passage of time/years. In general, prices will increase with each year. Inflation or price increases occur because demand for goods and services increases and/or the cost to provide those goods and services increases. Wages also increase along with costs.

Investments

Money that is used to make money. Investments are generally held in the form of stocks, bonds, or in funds that own a combination of stocks and/or bonds.

Investment Accounts

In Canada, there are three primary accounts which investments are held:  

Margin Account: This is a normal investment account. Investment gains are taxed at a rate much lower than your income tax rate. It is called a margin account because banks will often give “margin” which is a loan to invest, secured on the stocks held in that account.

TFSA: Tax free savings account. All gains are tax free. The Canadian government began the TFSA program in 2009. Each year a total of $5500 can be contributed to a TFSA account. This number has fluctuated since its launch. The total contribution room for all Canadians in 2020 is $69,500.

RRSP: A registered retirement savings plan. These accounts are put in place to encourage saving and investment for retirement. Pre-tax money can be deposited into these accounts avoiding tax in the current year and investment gains are not taxed. On withdrawal the money is taxed as income. The downside is a forced withdrawal when you are older and a massive tax paid on transfer after death.  RRSP withdraws prior to retirement are taxed at your highest marginal tax bracket – similar to if you made a bonus.

Investment Strategy

There are two primary investment strategies:  

Active: The continuous buying and selling of assets like stocks and bonds in an effort to expose pricing inefficiency… Mike bought Apple at $300 as he thought the stock was undervalued. He then sold it at $320 two weeks later.

Passive: The one time buy and hold investment in assets. Mike bought the S&P 500 ETF believing it would return 5-7% per year over the next 20 years. 

Limit order

When buying or selling a stock, a limit order indicates a specific price (or better) at which the buyer or seller is willing to transact. A stock limit buy order would be: Apple stock is $301 and sellers are willing to sell at $301. Entering a $300 limit order suggests a willingness to buy at $300 or less. Until a seller is willing to sell at $300 or less the transaction will not take place.

Market

Anywhere things are bought and sold. In the case of finance, we are referring to 2 primary markets:

Bond Market (or credit, or debt): Total value as of 2017 is ~$250 trillion = total debt outstanding for all countries and companies. US is 2/5 of this. IT will be MUCH higher than this after corona virus.

Stock markets (or stock exchanges): The value of corporations. Ownership is ~1/3 the size of amount lent. Currently around $80 trillion-$85 Trillion. 

Market Order

When buying or selling a stock, a market order indicates the buyer or seller will transact at any price as put forward by the market. A stock market order would be: Apple stock is $301 and sellers are willing to sell at $301. Entering a market order requires no specific price and the buyer will buy the stock at $301 or higher.

Mutual Funds

A mutual fund is a bundle of professionally managed investments. The bundle is made up of stocks, bonds, and other securities. Individuals can purchase a single mutual fund and benefit from the results of everything that is included. The nature of ‘bundling’ helps level out performance and risk so you won’t experience a huge loss if one portion performs very poorly.

Online Brokerage

An online platform that offers you the ability to buy and sell stocks, bonds, ETF’s, and mutual funds. Each bank has their own online brokerage platform.

Recession

At least a 6-month period of time where the economy is getting worse.

Return

The gains made from the increase in value of assets plus the periodic payments made to the owner of the asset (such as dividends for stocks or rent in real estate).

Risk

The chance, however small, that something will happen that is not supposed to happen 

Robo-advisor (Such as wealth simple and other AI investor tools)

An investment advisor where the client facing interaction and often the investment strategies are run digitally. There are many robo-advisors such as WealthSimple and they have very much increased in prominence over the last 10 years.

S&P 500

An index representing the 500 largest US publicly traded stocks. Each stock making up the index is weighted by the size of the company determined by its market cap (see below definition on stock).

Savings

Money that is put away with limited to no risk.

Stock

A company’s stock represents two things: a share and a price. The share represents an ownership “piece” of a company. If there are 1000 shares and I own 100, I own 10% of the company. Often times companies will have billions of shares. The price is the value of each share in the company. The value of a company is determined by multiplying its total shares by its price. This value is called Market Cap.

Stock Exchange

The market place where company shares (stocks) are bought and sold. The stock exchange is, at its core, a place where corporations go to raise funds for their operations. For investors to feel comfortable to give these corporations money, they need the ability to sell their stock. Examples of a stock exchange are the Toronto Stock Exchange (TSX), National Association of Securities Dealers Automated Quotations (NASDAQ), New York Stock Exchange (NYSE) and the London Stock Exchange (LSE). A stock exchange is not an index, but an index can represent a stock exchange.

Tax Rate

Marginal Tax Rate: The amount of tax you pay on each additional dollar made. Taxes on each dollar made depend on the bracket. Canadian federal income tax is 15% up to $48,535 of income, 20.5% from there to $97,069 and up to 33% on all income over $214,368. If you make $60,000 a year, you would owe 15% tax on $48,535 ($7280.25) and 20.5% on $11,465 ($2350.32) for a total of $9,630.50.   

Effective Tax Rate: The actual rate of tax you pay. Calculated as a a percentage of total income. In the above example your effective tax rate would be $9630.50 / $60,000 = 16.05%.

Ticker

A stock market symbol, often composed of 3-5 letters, that represents a company. Often people will refer to the company by its ticker.  

Tranche (ie. tranched investing) 

A tranche is a portion of money and tranched investing is investing a portion of money over a period of time. If the investment portfolio is made up of $1000 and I am investing in 4 equal tranches, I would invest $250 each time.