It’s easy to get tripped up on finance terminology. After all, there’s a considerable vocabulary, and it can take a while to master. To help you along the way, here are 15 of the most-searched-for finance terms and what they mean.
Bear market (and “bull market”)
The prices of securities rise and fall all day throughout trading. But when the market experiences prolonged price declines of 20 per cent or more amid widespread pessimism and negative investor sentiment, it’s called a bear market. There are various strategies investors can use to cope with or even profit from a bear market. A bear market can last for weeks, months or even years.
Conversely, a bull market is one in which securities’ prices have risen by at least 20 per cent. When investor confidence is high, it can boost valuations for an asset class, like stocks or bonds. Prices continue to rise because there are more buyers than sellers. A bull market can still have down market days or months, but the overall trend remains up.
Compound interest
The expression “slow and steady wins the race” applies perfectly to compound interest. It means earning interest on your initial savings and then reinvesting it so you can earn interest on the new total – the original amount plus the interest. Often described as “interest on interest,” compound interest makes a sum grow faster than simple interest, which is interest paid on your initial savings only. However, the longer your time horizon, the more significant the impact.
Dividends
A dividend is a cash distribution that’s paid out from a company’s earnings when it decides to transfer value to shareholders rather than reinvesting cash back into the business. Holding a dividend-paying stock can be a way of gaining regular income (usually quarterly) while allowing for the potential growth of your investment.
It’s important to know that a stock’s dividend yield is never guaranteed. It can vary in response to market fluctuations and is paid only when a company chooses to.
Equities
Sometimes in finance, there can be several words that mean the same thing. Such is the case for equities, which is used as a synonym for stocks and shares. They all represent the same thing: part ownership of a company.
Exchange-traded fund
Similar to a mutual fund, an exchange-traded fund (ETF) is a pooled investment vehicle that owns a basket of underlying securities and divides ownership of those securities into shares. Investors can buy and sell these shares on a stock exchange, typically through a broker. Some services, such as RBC InvestEase, allow investors to get a portfolio of ETFs that’s managed for them by professionals.
Home equity loan / home equity line of credit (HELOC)
Home equity is the current value of your home minus your outstanding mortgage balance. As you pay down your mortgage and/or your home appreciates in value, your equity grows. Home equity loans and HELOCs use the equity in your home as collateral. These loans can be thought of as a second mortgage, as the loans are secured against the equity value of your home. Typically, home equity loans offer extremely competitive interest rates — usually close to those of first mortgages.
A HELOC is slightly different, in that it functions more like a credit card and you can access the funds as you choose. Unlike home equity loans, which is usually a lump-sum payment, HELOCs usually feature variable interest rates.
How to save money
This often-Googled term came up in our list and, let’s be honest, is probably what most of us are looking up in some way. Check out these handy money hacks, a list of tried-and-true strategies from our savviest colleagues.
Mutual fund
A mutual fund is a pool of investments in stocks, bonds or other securities funded by individual investors who each own units of the fund. It’s managed by a portfolio manager who buys and sells the securities in the fund’s portfolio and monitors market conditions. A mutual fund’s strategy may focus on a specific sector, region or asset class, or may invest in various asset classes. But all mutual funds have one thing in common: They hold multiple investments, which provides a degree of diversification.
There are fees associated with mutual funds, called Management Expense Ratio (MER). MERs are paid out of the fund before its return is calculated, so they are an indirect cost for investors. You can find a fund’s MER in its prospectus.
Retirement planning
Retirement planning refers to financial strategies of saving, investments and managing money in a way that will sustain individuals – and possibly their families – after they are no longer paid for work. Retirement planning takes into account not only assets and income but also future expenses, liabilities and life expectancy. All Canadians have access to a variety of tax-sheltered accounts, such as RRSPs, RESPs and TFSAs, which delay or reduce taxes and are commonly utilized in planning for retirement.
RRSP
These days, it’s not unusual to live for 30 years past the typical retirement age of 65. Many Canadians ensure their financial security for this period in their life by opening a Registered Retirement Savings Plan (RRSP) while still in their younger years.
The biggest benefits to an RRSP are that contributions are tax-deductible and you aren’t taxed on your investment growth until you withdraw the money in retirement—and by this time, you’ll likely be in a lower income bracket and taxed at a lower rate.
The Government of Canada sets limits on RRSP contributions. Check your limit by visiting My Account or MyCRA on the Canada Revenue Agency website.
Mark your calendar: The deadline for contributing to your RRSP is 60 days past December 31 after each tax year.
Stock investing / how to invest
A stock (also called an equity or share), is an investment that lets you own part of a public corporation and may allow you to vote on key decisions about its future. Stocks have the same risks that come with being a business owner: They let you take part in a company’s gains – such as capital gains and potential dividend income – and losses too.
TFSA
Tax-Free Savings Accounts (TSFAs) are registered investment accounts that boast tax-free growth of your investment income (dividends and interest). You won’t get a tax deduction for making a contribution as you would with an RRSP, but you also won’t pay taxes when you withdraw from a TFSA—which you can at any time, without penalty.
You can hold multiple types of investments, including stocks, options, exchange-traded funds (ETFs), mutual funds, bonds and guaranteed investment certificates (GICs) in a TFSA.
Like it does for RRSPs, the federal government sets limits on TSFA contributions. Your annual limit is calculated by taking into account the government’s annual dollar limit, your unused contribution room carried forward from previous years and any withdrawals or re-contributions you made in previous years.
TSX
A stock exchange is a market where stock sellers connect with stock buyers, and one such stock exchange is the TSX (Toronto Stock Exchange). With more than 1,600 companies listed in a wide variety of sectors, the TSX is Canada’s largest exchange.
Unsecured loans
Unlike a home equity loan, an unsecured loan is one that doesn’t require any collateral. Lenders approve unsecured loans based on a borrower’s credit history instead of relying on a borrower’s assets as security. These can include personal loans, student loans and credit cards, and require higher credit scores for approval as unsecured loans are riskier than secured loans for lenders.
Wealth management
Typically a service offered to high net worth clients, this is when a financial advisor collects information about the client’s goals and current situation and offers a personalized strategy that combines a range of financial products and services. These may include investment advice, tax planning, estate planning, accounting and retirement strategies.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
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