REMAIN PATIENT. STAY CONSISTENT.

Chapter 1.2:
[Extended] Investor's Glossary
December 20, 2017
By: Luis Tallavo, Project Coordinator, YFP
Dollar-cost Averaging (DCA)
    The main benefit behind “Dollar-Cost Averaging” is that no one can ever predict at any given time whether the market is going to go up or down. Most of the time as an investor, we try to avoid speculation and think of rational and logistical reasons for why a stock may rise in price or decrease, however, this isn’t always easy and sometimes not practical. For many looking to “buy and hold” tracking the stock market on a daily basis is unnecessary. This is where dollar-cost averaging comes in.

    By following a simple practice known as dollar-cost averaging, you can effectively protect yourself against the very common market fluctuations. Instead of attempting to time the market every time you want to buy or sell, you simply focus on accumulating assets on a regular basis. The best way to illustrate this is with a tangible example. Let’s say that as an investor you decide to purchase $100,000 into stock A at a price of $100 per share. In the event of a recession, say in a short 12 months the share price fell to $70, you would have acquired a loss of $30,000. Now instead of investing $100,000 and trying to time the market, let’s say you invest $25,000 every 3 months (each quarter). As a result, you have essentially eliminated the risk of trying to time the market because you end up purchasing fewer shares when the price is up and more shares when the price is down. At the end of the 12 months, your investment would be worth $83,790 only a 16% loss instead of 30%.

    The same thing happens when the price of the stock goes up. At the end of the day, dollar-cost averaging allows you to reduce market risk. It is a great strategy for investors looking to build their investments over time without worrying too much about where the market is going.

Exchange-traded fund (ETF)
    Exchange-traded funds or “ETF’s” for short, are simply funds that are traded on stock exchanges, just like stocks. ETF’s differ from stocks however because unlike stocks, ETF’s are funds and hold multiple assets. They can be comprised of stocks, commodities or bonds. Often ETF’s track an index (see stock index).

     Exchange-traded funds can be quite complex. They are often only sold in creation units, which are bundles of many thousands of ETF shares along with a basket of underlying securities. They are very attractive to investors because of the quick diversification that they offer, can be easily bought and sold (just like stocks), are very simple/transparent, and can sometimes be tax-efficient. They differ from mutual funds in that the fees are usually much lower, transparency is much higher (individual holdings are reported daily), flexibility is much higher (good for day trading or buy and hold strategies) and is also much more tax efficient.

Registered retirement savings plan (RRSP)
    Registered retirement savings plan, also known as an RRSP or RSP for short, is a Canadian account for holding savings or investment assets. An RRSP provides many different tax advantages in order to promote savings for retirement. There are limits and restrictions on how much money you can contribute to an RSP per year and taking money out of an RRSP account before retirement can be very expensive (withholding taxes apply). These taxes are very high and therefore it is strongly advised that you do not take money out of an RSP unless it is for retirement.

Tax-Free savings account (TFSA)
    Your tax-free savings account, also known as a TFSA, is an account that is exempt from taxes in any way by the government of Canada. It is very important as an investor that we make use of our TFSA because it can increase profits on investment since you do not have taxes eating away at your profits.
    
    Every year after a young investor turns 18, the government of Canada increases (by $5,500 as of 2017) what is known as your “contribution room”. Your contribution room is how much money you are allowed to legally allocate into your TFSA. There are restrictions on how much you can take out and put back in every year, however, your contribution room grows every single year. Remember, you never pay tax on the money inside your TFSA so make sure you make use of it!

Registered Education Savings Plan (RESP)
    A registered education savings plan, also known as a RESP is a contract between an individual and an organization. In this sense, the organization is “promoting” the individual through benefits. These benefits are known as educational assistance payments or EAP’s.

    An individual will name someone (usually their son/daughter) as a beneficiary and under the contract agrees to make contributions to that beneficiary specifically for the use of education. In turn, the contract states that the organization promoting the individual will also make contributions to the beneficiary. This allows for greater savings and in turn promotes saving for your education at an early age. There are different ways of setting up your RESP, for example, family plans or specified plans. Regardless, RESP’s are a great way to start saving up for your son/daughters future education.

Stock Market Index
    Have you ever tuned into the news while watching TV and heard words like “S&P 500” or “The Dow”? If so, you have already been exposed to what is known as a stock market index. Stock market indices are a measurement of the value of a section of the stock market. The S&P 500 is comprised of 500 large companies while other popular indices such as The Dow Jones are comprised of just 30. Another popular index is the NASDAQ composite which is comprised of over 3000 companies.

    Remember that an Index is purely for mathematical analysis of the stock market and economy and therefore, it may not be invested in directly. So why are they useful you ask? Because they serve as a summary of the market by tracking the top stocks. They serve as a benchmark against which to compare their own returns. Thanks to different stock market indices, we have a much better understanding of the market forces as we can see how different events in history impacted the market as a whole.

Equities (Stock)
    Equity is simply an investors ownership in any asset. Although there are different types of equity, the stock is the capital that is raised by a business and is issued through a subscription of shares and therefore, it signifies an ownership in a corporation. Stocks can be separated into common stocks or preferred stocks. The difference between the two mainly comes down to voting rights as well as claims on assets and earnings. Specific rights (such as dividend pay) vary between stocks so it is highly recommended that each stock is investigated and thoroughly understood before purchase.

    Owning shares of a company’s stock makes you a shareholder and as a shareholder, you are part owner of the company. The percentage of the company that you own depends on the number of shares you own relative to the total number of shares issued by the company. This means that as an owner, you also reap the benefits of the company’s success or failure in the form of stock valuation or devaluation.
 
Bonds
    Bonds are considered a rather safe (low risk) type of investment. A bond is a debt security where the issuer (usually government or corporation) owes the holder a debt and agrees to pay the debt plus interest by a given date. This date is known as the maturity date of the bond. Essentially, a bond is simply a form of a loan and as the holder of the bond, you are considered the “lender”.

It is very important to note that although bonds, like stocks, are also tradable financial assets, they are very different from stocks because as a bondholder you do not have an equity stake in the company. As a bondholder, you have what is known as a creditor stake in the company. This means that you are a lender to whom the company must repay and therefore, you have priority over stockholders.

Mutual Funds
    A mutual fund is a large pool of money put together by many investors and used to invest in securities such as stocks, bonds, and many other assets. There are two main strengths to mutual funds: diversity and professional management. Because a mutual fund usually holds hundreds or thousands of securities, shareholders gain a ton of diversification for a very low price. This diversification means that an investor's eggs are never in one basket and so when one company does very badly, the investor does not lose all their money.
    Mutual funds vary in risk depending on what securities make up the basket of goods and although some are riskier than others, they are a great way to obtain professional money management and instant diversification that would otherwise be more difficult to obtain yourself.

Fixed Income (debt)
    Fixed income is simply any investment in which either party is obliged to make regular payemnts of a fixed amount on a fixed schedule. An excellent example of this is a bond issuer having to pay interest to its investors at a fixed rate once a year.
    It is important to note that if the issuer of a fixed income security misses a payment, they have failed to meet the legal obligations of the loan and depending on the circumstances, the investors may be able to force the issuer into bankruptcy. For this reason, people who invest in fixed income securities are often looking for low risk, constant return on their investment.

Dividend
    A dividend is a sum of money that is paid regularly by a company to its shareholders out of its profits. These cash payments are generally decided on by the board of directions and can include more shares of stock or even property. Not all companies provide dividends, companies that require their profits be reinvested will rarely provide dividends. Generally, it is the larger more established companies that tend to issue dividends with the intentions of increasing shareholder wealth.

Capital gain (loss)
    A capital gain or loss is simply the increase or decrease in the value of any capital assets the investor may hold by comparing it to the value of the assets purchased price. It is important to realize that a capital gain or loss is only ever “realized” once the capital asset is sold.
    
Guaranteed Investment Certificate (GIC)
    A guaranteed investment certificate (GIC) is a type of Canadian investment that is often issued by trust companies or banks. They have a very low-risk profile because they guarantee a rate of return over a fixed period, however, because they are more secure than stocks they also have a lower return.
    
    Another important type of GIC is a market growth GIC. These GIC’s are stock indexed meaning that their interest rate is determined by the rate at which the stock market grows. If the S&P 500 has a market growth of 10% in 1 year, then the GIC will return an interest of 10%. Unlike the other GIC’s, if the market performs poorly, the GIC could return an interest rate of 0%.

Index Fund
    An index fund is any fund that is constructed to match or track the components of a stock market index. Many are catered to match the famous S&P 500 while others track smaller stock market indices. This form of fund management is known as “indexing” and has been very successful in the past.
An index fund is a type of “passive” investing with the primary advantage being that it has lower management expense ratios. This means that it is a lot more expensive for an investment company to operate a typical mutual fund vs. an index fund.