Investment Terms You Need To Know
1. Rate of Return: gain or loss of an investment expressed as a percentage of the invested capital and is calculated on an entire investment portfolio to determine performance.
- Planning your Rate of Return to match financial goals and your risk/reward profile is a necessary step to successful investment planning.
2.Asset Allocation is an investment strategy that balances Risk and Return by placing investments inside an investment portfolio into different Asset Classes like equities/stocks, fixed income, and cash. Each class has its own characteristics and can contribute more to the total as proportions increase.
- Asset allocation helps manage risks and rewards to meet your financial needs.
3. Equities is a broad term used to describe ‘stocks’ or shares of a company. Most owners of shares believe they own shares, but, in fact, they own the company.
- In the case of publicly traded companies people investing for retirement own a very small percentage of the company, but they are the owners.
4Fixed Income is a category of investments that generate interest at a predictable, stable amount.
- Fixed income instruments inside a portfolio are often meant to be the safest investments. In the case of GICs, the balance is guaranteed by insurance and the interest payments typically have a very strong track record of occurring.
5. Cash and Cash‐like instruments are highly liquid investments
- These investments can take advantage of market opportunities, and accommodate short‐term unexpected personal expenditures without forcing the sale of an investment at an inopportune time.
6. Capital Gains: Increase (or loss) in the value of a security at the time it is sold versus its cost when purchased.
- Since capital gains are taxed in Canada at a lower rate than interest income, depending on the province or territory, the highest marginal tax rate for capital gains is approximately 25%.
7. Interest Income: Payments made to the owner of capital for the use of that capital and is calculated by multiplying the capital amount by the interest rate being paid for a particular period of time.
- Example – a $10,000, one‐year annual‐pay GIC paying 1.5% generates $150 of interest income each year, and would be paid on the anniversary date.
8. Dividends: Payments made monthly, quarterly, semi‐annually or annually to the “owner of record” of a share of a company. The dividend yield is calculated by dividing the expected dividend for the next year by the current share price.
9. Basis Points a single basis point is one‐one hundredth (1/100th) of a percentage point (1%) or 0.0001. Mathematically, a basis point is equal to one ten‐thousandth.
- Basis Points are used to express very small changes in numbers like percentages or the value of the Canadian dollar compared to the US dollar, for example.
10. Volatility: the reaction of an investment to changes in the overall market. In other words, if the market goes up by 10%, will the stock react more, less or the same. Volatility is called ‘Beta.’ An investment’s Beta expresses how it reacts relative to the market, meaning the stock market in total.
11Diversification is a way to mitigate risk by placing investments in different kinds of investments (see Asset Allocation above) and by placing investments within an asset class in different industries, sectors, countries, etc.
- Diversification is a method used to manage risk by not having all of your eggs in one basket. If a country or an industry or a single company has a bad day, month or year your entire portfolio will have a measure of protection by being spread around.
This article was prepared solely by Gary Robertson and Dixi Robertson who are registered
representatives of HollisWealth Advisory Services Inc. (a member of the Mutual Funds Dealers
Association of Canada and the MFDA Investor Protection Corporation) and HollisWealth® (a
division of Scotia Capital Inc., a member of the Canadian Investor Protection Funds and the
Investment Industry Regulatory Organization of Canada).
The views and opinions, including any recommendations, expressed in this newsletter are those of
Gary Robertson and Dixi Robertson
alone and are not those of HollisWealth Advisory Services Inc. or HollisWealth. ® Registered
trademark of The Bank of Nova Scotia, used under licence.
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