How to understand the language of finance like a boss.
DOES THIS SOUND FAMILIAR? A colleague is talking to you about the alpha of one of their investments. You nod your head, but your eyes gloss over. The discussion ends and you wonder what you just had a conversation about.
Finance-speak can be confusing to many of us. There are a lot of complicated words or terms used to explain some of the simplest concepts. Becoming more familiar with these terms can help you better understand your financial situation and give you more confidence when speaking with your advisor.
Alpha: It’s not just the first letter of the Greek alphabet. In finance, alpha is a measurement of how an investment performs compared to a benchmark index. Say your investment in a U.S. equity fund returns five per cent, while the S&P 500 Index earns one per cent – the alpha is four, because your investment outperformed the benchmark by four per cent.
Annuity: A contract between you and an insurance company. You make a lump-sum payment or series of payments, and in return you get a set monthly income for a set period.
Asset allocation: The strategy of dividing investments among different asset categories like stocks, bonds and cash.
Beneficiary: The person(s) named on your life insurance policy or segregated fund contract to receive the death benefit when you die. Registered Retirement Savings Plans and Tax-Free Savings Accounts also have beneficiary designations.
Beta: A measurement of the volatility of an investment compared to the market. The beta of the overall market is 1 or neutral. An investment with a beta above 1 is more volatile than the market, while lower than 1 is less volatile.
Bond: Companies and governments issue bonds to fund operations, innovate and grow. When you buy a bond, you are essentially loaning money to the issuer, which promises to return your money by a specific date and pay you interest for that period.
Capital gain/loss: Simply put, the difference between the price you paid for a property or an investment and the price you sold it for.
Commodity: A basic good, raw material or agricultural product that can be bought or sold on the market, like gold, sugar or grains. Some financial and technological products can be commodities, such as foreign currencies or cellphone bandwidth.
Compound interest: The interest calculated on the initial principal of a loan or deposit, plus all the accumulated interest. In other words, it’s interest on interest.
Dependant: A person eligible to be covered by you under your benefits plan, for example, your spouse or child.
Dividend: Money an investment fund or company pays to its shareholders, usually from profits, and expressed on a per-share basis.
Exchange-traded fund (ETF): A basket of securities (which can include stocks, commodities or bonds) that trades on an exchange. The price of an ETF’s shares will change throughout the trading day since they are bought and sold on the market.
Living benefits insurance: Insurance that provides the benefit while the insured person is alive, such as critical illness, disability, long-term care, health, dental and travel insurance.
Mutual fund: Pools of money contributed by investors with similar investment goals and managed by investment professionals. Mutual funds typically invest in bonds, stocks or both depending on their investment objectives. Unlike ETFs, mutual funds are priced once a day.
Portfolio: A group of investments owned by one organization or individual and managed as a collective whole with specific investment goals in mind.
Rider: An optional addition to an insurance policy to provide protection, for an additional cost, for risks not covered in the basic policy.
Segregated fund contract: A pool of investments held by a life insurance company and managed separately from its other investments. Segregated fund contracts combine the growth potential of investment funds with insurance protection – you are guaranteed to receive at least a set percentage of what you’ve paid into the plan on death or maturity (less any amounts withdrawn), even if the investments have dropped in value. Segregated fund contracts also offer useful estate planning features and potential creditor protection.
Stock: Companies issue stock to raise capital. In return the stockholder is given a proportional share in ownership of the company. This comes with a proportional voting right to determine how the business is run and a right to receive dividends, if any are paid.
Volatility: The amount and frequency by which an investment fluctuates in value.
Yield: The earnings generated by an investment expressed as a percentage of its market value over a specific period. Only an investment that pays interest income or dividends can have a yield attributed to it.
WHAT IS THE REPO MARKET?
You may have heard the term “repo market” a lot in the news last fall and wondered what it was. An obscure part of the financial system, the repo market is almost like a giant pawn shop. “Repo” is short for repurchase agreements – short-term loans (with collateral), often made overnight. The way it works is one party lends cash to another and earns a small amount of interest. The borrower secures the loan by posting a security (typically a bond) as collateral. The borrower repurchases the security the following day at an agreed-upon price.
In the Canadian repo market, large banks do the borrowing and large investment institutions, such as pension funds, do the lending.
© 2020 Manulife. The persons and situations depicted are fictional and their resemblance to anyone living or dead is purely coincidental. This media is for information purposes only and is not intended to provide specific financial, tax, legal, accounting or other advice and should not be relied upon in that regard. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. E & O E. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value.