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Glossary of Tax, Financial, Investing and Accounting Terms

Some of the Glossary items relate only to Canada, but most can be used in the United States as well.

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Accounts payable

Accounts payable turnover ratio

Accounts receivable

Accounts receivable turnover ratio

Accrual basis accounting vs cash basis accounting

Accrued Interest

Accrued interest is interest which has accumulated since the last interest payment date.

Accumulated depreciation

Accumulated income payment (AIP) re RESPs

Active business Income

Adjusted cost base (ACB), or cost basis

Age of majority / minor

Aged accounts receivable report

Allowable business investment loss (ABIL)

Allowable capital loss

Amortization and depreciation

Anniversary day of an investment contract

Annual report

Public corporations must make available to their shareholders a yearly report which includes the financial statements of the corporation.

Arbitrage

Arm's length

Arrears

Arrears are amounts owed that were not paid when due.  For instance, if one of your company's customers still owes amounts that they should have paid by now, their account is in arrears.

Articles of incorporation

Ask/bid

The ask price on a security is the price that a prospective seller is willing to accept, and the bid price is the price that a prospective buyer is willing to pay.

Asset Allocation

Assets

Assistance holdback amount re Registered Disability Savings Plans

Automobile

For purposes of the Income Tax Act, an automobile is a motor vehicle designed to carry people on highways and streets, and can carry a driver and no more than 8 passengers.  A taxable benefit will arise when an employee is provided an automobile which is used partly for personal use.  See the topic Auto taxable benefits on the Small Business page.

The definition of automobiles excludes:
    -ambulances,
    -clearly marked emergency-response vehicles used in the course of an individual's employment with a fire department or the police,
    -a motor vehicle acquired primarily for use as a taxi,
    -a bus used in the business of transporting passengers,
    -a hearse used in a funeral business, as well as 
    -the vehicles described as motor vehicles in the CRA chart of vehicle definitions on the Small Business page.

A passenger vehicle is an automobile that was purchased or leased after June 17, 1987.  For income tax purposes, there are limitations on the expenses that can be claimed for a passenger vehicle.  There are special rules for GST registrants for claiming input tax credits on the purchase of passenger vehicles.  

Average collection period

See day's sales outstanding.

Averaging down

Averaging down is when you purchase a security that you already own, for less than the price you originally paid.  This lowers your average cost.

Tax Tip:  Pay down all non-tax-deductible debt with over 8% interest, then see our Save and Invest page. 

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Back-end load fund

This type of mutual fund charges a redemption fee when the shares in the fund are eventually sold by the investor.  This fee is also often called a deferred sales charge (DSC).  It may be calculated based on the original investment cost, or on the market value of the investment at the time of redemption.  The percentage amount of this fee is usually reduced each year that the fund is held, and can be zero if the fund is held long enough.  Many back-end load funds will allow a portion of the investment to be redeemed each year without charge.  Also, as with all mutual funds, trailer fees are paid annually by the fund to the advisor, broker or dealer where you hold your funds.  See also front-end load fund, and no-load fund.

Balance sheet

A balance sheet is part of the financial statements.  The balance sheet reports the amounts of assets, liabilities, and owners' equity at a specific date.  The total of all assets is always equal to the total of liabilities plus owners' equity.  This is a function of the double-entry accounting system.

Bank of Canada Rate

Bankers' acceptance

A bankers' acceptance is a short term debt instrument guaranteed by a bank, and sold through a brokerage company to investors.

Basis point

A basis point is 1/100th of 1%, or .01% (.0001), and is used to refer to changes in interest rates, such as the Bank of Canada prime rate, or the yield rate on bonds.

Bear market

A bear market is a declining market (prices are falling).  A person who expects that the market will decline is called a bear.

Bearer security

A financial instrument, such as a bond, stock or other security that is not registered in any name.  This means it is cashable by the person physically holding it.  See also street name.

Bid/ask

The bid price on a security is the price that a prospective buyer is willing to pay, and the ask price is the price that a prospective seller is willing to accept.

Blue chip

A blue chip stock is a stock which has a long record of being high quality, in terms of stability, dividends, earnings, etc.

Board lot

A board lot is usually 100 shares.  Trades on stock markets are usually made in multiples of a board lot.  See also odd lot. 

Bond

A bond is interest-bearing debt issued by corporations, governments and institutions, with the principal (face value) to be repaid at a specified date (or dates) in the future.  Interest is to be paid on the principal at a specified rate per period.  Bonds may be secured (backed by a claim on specific assets) or unsecured (backed by the issuer but not by any specific collateral).  Bonds may be sold for more (at a premium) or less (at a discount) than their face value.  See also bond discount, bond premium, and strip bond.

Bond discount

When a bond sells for less than its face value, it is sold at a discount.  The discount is the difference between the face value and the purchase price.  Bonds sell at a discount when their coupon rate (rate of interest paid based on the face value of the bond) is less than the current market rate for that type of bond.  When long term interest rates rise, bond prices generally decrease.

Bond premium

When a bond sells for more than its face value, it is sold at a premium.  The premium is the difference between the purchase price and the face value.  Bonds sell at a premium when their coupon rate (rate of interest paid based on the face value of the bond) is greater than the current market rate for that type of bond.  When long term interest rates drop, bond prices generally increase.

Book value (of an asset)

The book value of fixed assets is original cost less accumulated depreciation.

Book value per share

This is the total shareholders' equity (as stated on the balance sheet), divided by the total number of common shares outstanding

Bull market

A bull market is a rising market (prices rising).  A person who expects that the market will rise is called a bull.

Business investment loss

A business investment loss is a capital loss arising from an arm's length disposition of:

50% of a business investment loss is an allowable business investment loss, which can be written off against any income.

For further information see Business investment loss on the Small Business page.

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Call Options and Put Options

Callable

A callable security is one which can be redeemed by the issuer before the expiry date.

Canada Revenue Agency (CRA)

Canada Revenue Agency, formerly Canada Customs and Revenue Agency, and formerly Revenue Canada Taxation.  The CRA administers tax laws for the Government of Canada, and for most provinces and territories.  The CCRA became the CRA on December 12, 2003.

Canadian controlled private corporation (CCPC)

Capital cost allowance (CCA)

Capital dividend

Capital gain or loss

Capital personal property

There are special rules for GST registrants for claiming input tax credits on the purchase of capital personal property.

Capital personal property includes movable capital property, such as office furniture, computers, photocopiers, movable machinery and equipment, and free-standing appliances.  Built-in appliances are fixtures, and are usually considered part of capital real property. 

Capital property

Capital property includes fixed assets, and items which are purchased for investment purposes, such as stocks and bonds.  Any gain or loss on the sale of capital property is considered a capital gain or loss for tax purposes.

Capital real property

Capital real property includes land and buildings, and any items which are installed in and attached to the buildings or land.   Capital cost allowance can be claimed on buildings and attachments, but not on land.  

There are special rules for charging GST/HST and for claiming GST/HST input tax credits on capital real property.

Capital stock

Capital stock is the total amount of money (equity) invested in a corporation by its shareholders (owners).  The capital stock is made up of individual shares, which are registered in the names of the shareholders (also called stockholders).

A corporation may have more than one class of share, with different rights attached to them.  At least one class of shares will have voting rights, but there may be classes of shares which do not have voting rights.  There are many corporations with 2 classes of shares, let's say Class A and Class B shares, where the Class A shares have voting rights, and Class B shares do not.  In many of these cases, the Class B shareholders will have a much greater investment in the corporation than the Class A shareholders.  The Class B shares are issued in order to raise funds without losing voting control.

See also common shares and preferred shares.

Cash basis accounting vs accrual basis accounting

Cashflow / cashflow per share

The "cashflow" used in reporting cashflow per share usually means net income with depreciation and amortization added back.  See also operating cashflow and free cashflow.

Cashflow per share is cashflow divided by the total number of common shares outstanding.

Cashflow statement

The cashflow statement is a financial statement which reports the reasons for changes in cash balances for a period of time. It provides details of changes in cash balances resulting from operating activities, financing activities, and investing activities.

Central bank

A central bank, such as the Bank of Canada, tries to prevent the country's currency from rising or falling too much or too quickly.

See our Statistics page for more information on the function of the Bank of Canada.

Children's special allowances (CSA)

Children's special allowances are non-taxable amounts paid monthly, by the federal government, to agencies, institutions and foster parents who are responsible for the care and education of children under 18.

For more information see the Canada Revenue Agency web page Children's Special Allowances.

CICA

CICA was the Canadian Institute of Chartered Accountants. The CICA handbook was the primary source of generally accepted accounting principles (GAAP). In 2014 there was a merger of Chartered Accountants (CAs), Certified General Accountants (CGAs) and Certified Management Accountants (CMAs) in Canada, resulting in the new organization, Chartered Professional Accountants Canada. The new designation is CPA.

Closed-end fund

This is an investment company which has a fixed number of shares.  The shares trade on a stock exchange (such as TSX, NYSE, AMEX, etc) at market value.

See also mutual fund, open-end fund, exchange traded fund, and management expense ratio.

Collateral

Collateral is property which is pledged as security for the repayment of a loan.

Commercial paper

Commercial paper is a short term debt instrument issued by a corporation and sold through brokerages to investors.

Commodity

In financial markets, usually refers to agricultural or resource products, which are traded on commodities exchanges.  Examples:  wheat, coffee, lumber, oil, copper, pork bellies, etc.

Common-law partner

Common shares

When a corporation is formed, common shares are purchased by investors who then become shareholders in the corporation, and hold voting privileges.  Common shareholders elect the board of directors, and vote on other matters which require the approval of the owners of the company.  If a corporation is liquidated, the common shareholders have the right to a share of the assets of the corporation, after any prior claims on the corporation have been settled.

A corporation may authorize an unlimited number of common shares to be issued, so that they may raise funds in the future by issuing more shares.

See also capital stock and preferred shares.

Company

Compound interest

Conglomerate

Connected corporation

1. one of the corporations controls the other corporation (owns more than 50% of the voting shares), or
2. one corporation owns more than 10% of the voting shares and more than 10% of the fair market value of all the shares of the other corporation.

Consolidated financial statements

Consolidated financial statements group together the financial results of a parent company and its subsidiaries.

Consumer price index (CPI)

The consumer price index (CPI) is a measurement produced by Statistics Canada which is meant to reflect the increase in the cost of living.  Current and historical CPI data can be obtained from the Bank of Canada and Statistics Canada web sites.

Contract

A contract is a legally binding agreement between two parties.

Contributed surplus

When shares are issued by a corporation and sold above par value, the amount in excess of par value becomes contributed surplus, which is a part of shareholders' equity on the balance sheet. 

Convertible

A convertible bond, debenture or preferred share is a security which may be exchanged, usually for common shares of the company, at a set price, for a fixed period of time.

Corporation

A corporation is a separate legal entity, which is formed by application to either the federal government, or one of the provincial/territorial governments.  The corporation issues shares (capital stock) to one or more shareholders.  A corporation has limited liability.  This means that the liability of the shareholders is limited to the amount of their investment in the shares of the corporation.  However, shareholders who are directors of the corporation can be held legally liable for some debts of the corporation (such as GST and payroll taxes) in certain circumstances.

See also Canadian controlled private corporation (CCPC), and public corporation.

See also Should you incorporate your small business?

Cost basis (stocks)

Coupon

A coupon is the interest payment portion of a bond.  When a bond is issued, a brokerage company will buy bonds and will sometimes split them into two parts to sell separately.  One part is the interest payment (coupon), and the other part is the maturity value of the bonds, sold as strip bonds.

Covered call option

- See Call Options and Put Options

Covered put option

 - See Call Options and Put Options

Cumulative Net Investment Loss (CNIL)

The CNIL balance is the amount by which the total of all investment expenses exceeds the total of all investment income for all tax years after 1987.  The CNIL can be calculated by filling in CRA's form T936 for each year after 1987.

The CNIL is used in the calculation of the $750,000 capital gains deduction available on the sale of qualified capital property.

Current account

The current account of Canada is a measurement of the flow of goods, services, and investment income to and from other countries. If Canada is receiving more money from investment income and exports of goods and services than it is paying out, then there is a current account surplus.  Investment income includes interest, dividends, and property rental income. 

Current assets

These are assets which are expected to be either consumed or converted to cash within one year, or are able to be readily converted to cash.  Examples are accounts receivable, inventories, short term investments, and prepaid expenses such as insurance.

Current liabilities

These are debts which are due to be paid within one year, such as accounts payable, accrued liabilities, and the portion of long term debt which is due within 1 year.

Current ratio  (C/R)

Current assets divided by current liabilities.  This is a measure of the liquidity of the company.
Example:  current assets $25,000, current liabilities $20,000, C/R = 25,000/20,000 = 1.25

Cyclical stock

A cyclical stock is one which tends to have greater price fluctuations over an economic cycle.  Manufacturing and resources tend to be cyclical sectors.

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Day order

An order to buy or sell securities, valid only on the day for which the order is placed.

Day's sales outstanding ratio, also called average collection period

Debenture

A debenture is a type of debt issued by a corporation.  It is not secured by any specific assets, as is a bond.  A debenture is backed by assets of the corporation that have not been pledged as security for other debt.

Debt/Equity ratio (D/E)

This measure of financial strength is calculated as a company's total debt divided by its total shareholders' equity.  The lower the number, the better.

Deemed disposition

Deferred life annuity

Deficit

When referring to the government deficit, this is the excess of expenditures over revenues for a one year period.  The National Debt is the total debt of the Federal government, and when there is a deficit the debt is increased.  See Government of Canada Debt in Selected Years.

When referring to the financial statements of a corporation, a deficit occurs when a corporation has accumulated more losses than profits over the years.  This shows up as a negative amount of Retained Earnings on the balance sheet.

Defined Benefit Pension Plan (DBPP)

Defined Contribution Pension Plan (DCPP)

Depreciation and amortization

Derivative

A financial product whose value is derived from fluctuations in the value of an asset, such as call and put options and futures.  See also hedging and speculator.

Director

Directors are the people elected by shareholders to oversee the management of the company.

Discretionary account

A discretionary account is a brokerage account where the client has authorized the broker to buy and sell stocks without contacting the client.

Diversification

Diversification is a method of reducing risk by buying assets in different industries, different countries, and different types of securities such as bonds, stocks, etc. (Don't put all your eggs in one basket.)

Dividend

An amount distributed out of a corporation's retained earnings (accumulated profits) to shareholders.  Dividends on preferred shares will usually be for a fixed amount.  Dividends on common shares may fluctuate depending on the profits of the company.  Some companies pay dividends on common shares, and some do not.  See also dividend tax credit.

Dividend reinvestment plan (DRIP)

A DRIP is a dividend reinvestment plan, whereby when a dividend is issued to the shareholder, it is used to purchase further shares of the company instead of paying out a cash dividend.  These purchases are usually done with no brokerage fees. Shareholders can only participate in a DRIP if they have shares registered in their own name, instead of in street name.  The dividends that are reinvested in more shares are still considered taxable dividend income.

Dividend tax credit

Dividend yield

This is the % obtained by dividing the dividend per share by the current market price per share, x 100.

Example:  market value per share $37, annual dividend $1.85, yield = 1.85/37 x 100 = 5%

Dollar cost averaging

Instead of purchasing a large number of shares at one time, a smaller number of shares are purchased at regular intervals over a period of time.  This reduces volatility, because stocks usually go up slowly, but can go down quickly.

Due diligence

Performing an investigation to verify information, often regarding a business which is being considered for purchase.

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Earnings per share  (EPS)

Net earnings of the company divided by the total number of common shares outstanding.

Note that beginning in 2002, corporations are no longer required to amortize the cost of their intangible assets such as goodwill every year.  Intangible assets are recorded at cost on the balance sheet.  That cost must be reviewed annually to determine if its current value is less than cost, in which case the value would be written down on the balance sheet.  Due to this change in accounting rules,  corporate net earnings will be increased over prior years, as will earnings per share.
It is best to look at the history of a corporation's earnings per share for the past decade, which can usually be found in their annual report.  Most annual reports are available on the company's web site.  
Analysts also predict the future earnings per share for corporations.  This information can be found on many investing web sites, some of which are listed in our Links page.

Earnings per share fully diluted

Net income of the company divided by the total number of common shares that would be outstanding if all convertible financial instruments (convertible debentures, convertible preferred shares, stock options, etc.) were converted into common shares.

EBITDA

Earnings before interest, taxes, depreciation and amortization.

Educational assistance payment (EAP)

An educational assistance payment (EAP) is a payment from a Registered Education Savings Plan (RESP) to a beneficiary of the plan, and is made from the earnings and Canada Education Savings Grant (CESG) portion of the RESP.  This payment is taxable in the hands of the beneficiary of the RESP.

See RESPs - Be Aware, and Beware! on our Save Money page.

Effective interest rate

Eligible capital property, eligible capital expenditures, and cumulative eligible capital deduction

Employment Income

Enterprise value

The enterprise value of a corporation is calculated as its market cap plus debt and preferred shares, less cash and short term investments.  This value is also referred to as a theoretical takeover value.  

Consider a corporation with a market cap, or market value, of $100 million, which has no debt, but has $10 million in cash and short term investments.  In a takeover, the buyer would pay $100 million, but would then have the $10 million in cash, for a net cost of only $90 million.

Consider the same corporation, but this time it has $20 million in debt as well as the $10 million in cash.  The buyer would need an additional $20 million to pay off the debt, or else would have to pay interest on the debt.  Thus, the net cost would be $100 million, less $10 million, plus $20 million, or $110 million.

Ex-dividend

When a stock is sold ex-dividend, this means the purchaser is not entitled to the most recently announced dividend.

Ex-dividend date

The ex-dividend date is the first trading day on which the seller of the stock, not the purchaser, is entitled to the most recently announced dividend.  When the trade date is before the ex-dividend date, the purchaser is entitled to the dividend.  The ex-dividend date is two business days prior to the record date.  See also settlement date.

Exchange-Traded Funds (ETFs)

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Face value

The face value of a bond is the value the bond is worth at maturity.  A newly issued bond usually sells at face value.  Between issue date and maturity date, the market value of the bond will fluctuate depending on current interest rates, and the bond will trade at a premium or a discount.

Financial statements

These usually consist of a Balance Sheet, Income Statement, Cashflow Statement, and Notes to the Financial Statements.  Most public corporations publish their financial statements in an Annual Report which is sent to shareholders.  They also usually publish quarterly financial statements, which may or may not be sent out to shareholders.  Most public corporations also have their financial statements available on their corporate web sites, or will mail copies to interest parties.

Fiscal period/fiscal year

Many businesses prepare their accounting records on a calendar year basis, with December 31 as their year-end date.  Their fiscal year is the same as the calendar year.  Some businesses prefer to have their year-end date coincide with a slow period in their business, so they may choose another date as their year-end.  If they choose March 31, then their fiscal year, or accounting year, is April 1 to March 31.

A fiscal period is normally 12 months, but may be less than 12 months when a business starts up.

Self-employed people generally have to pay tax based on a December 31 year-end.  See How does a self-employed person choose a year-end, on our Small Business page.

Fixed assets

Also called property, plant and equipment, or capital property.  These are assets which have a long life, and can include land, buildings, machinery, and equipment.  Land cannot be expensed, or written off against income, but other fixed assets can be written off against income over a number of years.  The Income Tax Act specifies what percentage of the cost of a fixed asset can be written off each year as capital cost allowance.

Free cashflow

Free cashflow is calculated as EBITDA (earnings before interest, taxes, depreciation and amortization) minus taxes paid during the year, minus capital expenditures, minus dividends, and plus or minus changes in working capital.  See also cashflow and operating cashflow.

Front-end load fund

This type of mutual fund charges a sales commission, often in the range of 2% to 5%, when the mutual funds are purchased.  Also, as with all mutual funds, trailer fees are paid annually by the fund to the advisor, broker or dealer where you hold your funds.  See also no-load fund, and back-end load fund.

Fundamental analysis

Analysis of a company and its financial strength, in order to determine its value.  Fundamental analysis is used by value investors.

Futures contract

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GAAP

GAAP stands for generally accepted accounting principles.  The financial statements of a business must be prepared according to GAAP.  The primary source for generally accepted accounting principles used to be the CICA handbook.  In 2014 after the merger of CAs, CGAs and CMAs under the new designation of CPA, this changed and now financial statements for private corporations must be prepared either according to International Financial Reporting Standards (IFRS), or Accounting Standards for Private Enterprises (ASPE).

GIC

A GIC is a guaranteed investment certificate.  GICs are interest-bearing investments which can be short or long term.  Funds are normally locked in until the maturity date, although some GICs have the option of cashing in early.

See also index-linked GIC.

Goods and services tax (GST/HST)

Goodwill

Gross margin

Gross margin, also called gross profit, is determined by deducting cost of goods sold from total revenue.

Gross margin %

The gross margin percentage is gross margin divided by total revenue.

Group RRSP

See Group RRSPs on our Company Pensions page.

Growth investor

A growth investor purchases shares in companies which are expect to grow their revenues and earnings at above-average rates.

See also momentum investor and value investor.

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Hedge fund

A loosely regulated pool of capital which tries to increase returns by using options, futures, leverage, short-selling, restructuring companies, and other means.  These are volatile investments, and the average investor should not invest a large percentage of their assets in these funds.

Hedging

Holding company

Immediate life annuity

In kind transactions

In the money

A call option is in the money when the share price is above the strike price.

A put option is in the money when the share price is below the strike price.

Income statement

An income statement is part of the financial statements of a business.  The income statement reports the net income of the business for a period of time, showing the totals for sales, costs of sales, operating expenses, general and administrative expenses, interest expense, income tax expense, and extraordinary expenses.  The financial statements of a business are normally prepared monthly, although some small businesses or proprietorships may prepare them less often.  Publicly traded corporations normally  publish their financial statements quarterly and annually.

Income trust

An income trust is an unincorporated business entity which pays little or no income tax by flowing earnings through to unitholders (holders of trust units).  The trust units trade on stock exchanges.  The tax situation for some income trusts is changing due to changes announced by the federal government in October 2006.  For more information see our article on the tax treatment of income trusts .

Index

A stock index is a statistical tool which provides the value of a group of securities.   For instance, the Dow Jones Industrial Average is an index which is made up of 30 U.S. industrial companies, and provides a benchmark which reflects the health of the U.S. economy.

Index-linked GIC

This is a GIC which is linked to a stock index, and is usually guaranteed to return all of  your original investment.  The income is taxed as interest, not capital gains, so these are more suitable to be held inside a registered account such as an RRSP, RRIF, etc.

Individual Pension Plan (IPP)

Input tax credit

An input tax credit can be claimed to recover GST/HST which has been paid by a GST registrant.  The input tax credit is usually the amount of GST/HST paid.  There are special rules for some situations, such as when capital personal property, capital real property, passenger vehicles or aircraft are purchased.  See our articles Input tax credits on purchase of passenger vehicles and aircraft, and Input tax credits on motor vehicle allowances.

Insider

An insider is a director, officer, or large shareholder (more than 10%) who can be presumed to have access to privileged information of the company.

Intangible asset

An asset having no physical substance, such as goodwill, trademarks, and patents.  Note that beginning in 2002, corporations are no longer required to amortize the cost of their intangible assets every year.  Intangible assets are recorded at cost on the balance sheet.  That cost must be reviewed annually to determine if its current value is less than cost, in which case the value would be written down on the balance sheet.  Due to this change in accounting rules,  corporate net earnings will likely be increased over prior years, as will earnings per share.

For tax purposes, most intangible assets are considered eligible capital property.

Interest coverage

Also called times interest earned, interest coverage reflects the ability of the company to pay its interest.  It is calculated as annual operating earnings (income before interest and taxes) divided by annual interest expense.  If the result of this calculation is 2, it means that the company's operating earnings are 2x its interest expense.

Interest rate sensitive

When an investment is interest rate sensitive, its value will fall as interest rates rise.  Most stocks are interest rate sensitive, but some, like financials and utilities, are more sensitive than others, such as consumer stocks and commodities.

Interest rates

Inventory

Inventory can include goods for resale, spare parts, materials, works in progress, etc.  Inventory is classified as a current asset on the balance sheet,

Inventory turnover

The inventory turnover ratio is calculated as

cost of goods sold
average inventory

Inventory turnover can be determined 2 different ways:

Generally, the higher the inventory turnover the better.  If the ratio is too low, or is decreasing, it means that more of the company funds are being tied up in inventory, and items in inventory could be becoming outdated.  In a business where prices are consistently dropping and products are constantly changing, such as computer hardware, it is wise to turn over the inventory as frequently as possible.  This has to be balanced against running short of inventory and losing sales as a result.

Investment company

This is a company which is primarily engaged in the business of investing in securities.  There are several kinds of investment companies:

1.  Mutual funds, also know as open-end funds
2.  Closed-end funds, and
3.  Unit investment trusts (UITs)
4.  Exchange-traded funds (ETFs)

The shares of mutual funds and UITs are redeemable.  Investors buy and sell the shares from and to the fund company at net asset value (NAV) per share at the end of the day.  

Shares of closed-end funds and exchange-traded funds are traded on a stock exchange, at their market value. 

UITs have a termination date at which time the fund will be liquidated, and proceeds are paid out to the investors.

Both closed-end funds and UITs have a fixed number of shares.  Open-end funds and exchange-traded funds have a variable number of shares.

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Large cap

Large cap (large capitalization) refers to corporations which have a total market value (shares outstanding x current market price) of over $10 billion for US companies, or over $1 billion for Canadian companies.

Leading indicator

Leading indicators are statistics which are used to forecast how the economy will be performing in the future.  Examples are unemployment rates, commodity prices, housing starts, inflation, bankruptcies, etc.

Lease

A contract for the rental of property.  The owner of the property is the lessor, and the person or company renting the property is the lessee.

If you are leasing property for a business, you will need to know if the lease is an operating lease or a capital lease, because they require different handling for accounting purposes.

Operating leases

Capital leases

 - also known as financial leases

Leverage

Leverage is the use of debt to increase return on investment.  When a firm has a high debt/equity ratio, it is said to be highly leveraged.

Liabilities

Amounts owed.  These may be current, which means due to be paid within 1 year, or they may be long term, which means not due for at least 1 year.

Life annuity

With an immediate life annuity, payments are started within one year after the purchase of the annuity.

With a deferred life annuity, payments are started no earlier than one year after the purchase of the annuity.

See Locked-in Retirement Account (LIRA) on our Company Pensions page for more information.

Life income fund (LIF)

Limit order

A limit order is an order to buy or sell securities on the stock market at a specified or better price.

See also market order.

Limited liability

The owners or shareholders of a limited company are normally only liable for the amount they have invested in the company.  If the business fails, they are not responsible for the debt of the company.  There are some instances in which directors can be held liable for certain debts, such as GST/HST and payroll taxes.  With a professional corporation, the shareholder's personal assets may be at risk in the case of professional malpractice.

See the article Should you incorporate your small business? on the Small Business page.

Limited Partnership

A limited partnership will have two classes of partners - general partners, and limited (or special) partners.  The liability of the limited partner(s) will be limited to the amount of capital they have contributed to the partnership.  However, certain actions by a limited partner will deem them to be a general partner and end the unlimited liability, such as taking an active roll in the management of the business.  In a limited partnership there must be at least one general partner who has unlimited liability. 

Liquidity

The liquidity of a stock refers to the ease with which it can be bought and sold.  If large volumes are usually traded in the stock, it is liquid.  If small volumes are usually traded, it is illiquid.

Listed personal property (LPP)

Listed stock

A listed stock is one which is listed, or traded, on a stock exchange.

Locked-in retirement account (LIRA)

Locked-in retirement income fund (LRIF)

Long sales of shares

Signifies ownership of securities.  If a person is "long" 100 shares of a corporation, it means that they own 100 shares of the corporation.  See also short sales of shares.

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Management expense ratio (MER)

The MER is the percentage of the value of the assets of an investment company (eg mutual fund, closed-end fund, unit investment trusts), that is deducted by the fund manager to cover the costs of managing the fund.  This is not part of the front end or back end fees paid to purchase the mutual fund, and is not a cost that is seen by the investor.  However, it reduces the return to the investor.  The MER is usually in the range of 1.5% to 3% per year.  

A much lower MER is charged by Exchange Traded Funds, or ETFs.  The MER rate can make a huge difference in investment returns over a period of 20 years.

Margin

If you have securities at a brokerage in a margin account, the brokerage will allow you to borrow a percentage of the value of your holdings.  A higher percentage is allowed for large cap stocks, and you cannot borrow anything against some small cap stocks.

Margin call

If you have bought stocks on margin, and the amount you have borrowed exceeds the margin limit that the brokerage has allowed you, you will receive a call from the broker asking you to either sell some stocks or transfer money into your account.

Marginal tax rate

Marked to Market

When an investment is marked to market, it is shown on the balance sheet at market value.  This results in changes in the market value being shown on the income statement as a profit or loss.

Market

The bringing together of people for the purpose of trade.  This can be done electronically in the form of a stock market, or physically in the form of a farmer's market.

Market cap

Market capitalization, or the total market value of the company, is calculated by multiplying the current price per share by the total number of common shares currently outstanding.

Market maker

A "market maker" is a firm that will buy and sell a particular stock on a regular and continuous basis at a publicly quoted price.  A stock exchange will appoint brokerages to act as market makers on certain stocks.  A trader from the brokerage will buy and sell shares on the open market, maintaining a minimum level of trading activity, and trying to reduce the price volatility in their assigned stocks.  On some exchanges, the market makers can buy shares from issuers.

Market order

An order placed to buy or sell a security immediately at the best current price possible.

See also limit order.

Market value per share

This is the current price of a security, as determined by the investors who buy or sell the security on a stock exchange.  See also bid/ask.

Maturity

The maturity date of a financial instrument such as a t-bill, GIC, loan, bond or debenture is the date at which it becomes due.

MER

Minor / age of majority

Momentum investor

See also growth investor and value investor.

Money market

Money market investments are short term financial investments such as t-bills, bankers acceptances, commercial paper, and GICs.

Money purchase RPP

Money supply

The money supply consists of bank notes and coins in circulation, all deposits at financial institutions, all mutual funds, individual annuities at life insurance companies, and Canada Savings Bonds.

For more information see the Statistics page.

Mortgage

Motor Vehicle

MRQ

Most recent quarter.  Some ratios reported on investment information websites may be calculated from the company's financial statements for the most recent quarter (3 month period).

Mutual fund

Also known as an open-end fund, this is an investment company which pools the money of many investors, and uses the money to invest in a variety of different securities.  The securities may be stocks, bonds, money market securities, or a combination of these.  The mutual fund has a fund manager to handle the buying and selling of securities.  The fund company does the recordkeeping for individual investors, providing reports which detail cost basis, dividend income, capital gains, etc.  For these services, the mutual fund company charges a management fee, which is usually expressed as a percentage of the asset value of the fund.  This is called the management expense ratio (MER).  This fee is taken from the fund by the fund manager to cover the costs of managing the fund.  Many mutual funds also charge fees when the funds are purchased (front end fees or loads) or sold (back end fees or loads).  The ones which do not charge these fees are called no-load funds.

See also closed-end funds, exchange-traded funds and net asset value.

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Naked call option

 - See Call Options and Put Options

Naked put option

 - See Call Options and Put Options

Net Asset Value (NAV)

The net asset value of an investment company is its total assets less its total liabilities.  Mutual funds and unit investment trusts (UITs) normally calculate their NAV at the close of each business day, and then all buy and sell orders are processed at the NAV.  The NAV for a closed-end fund need not be calculated daily, because its shares trade at market value, not at NAV.

Net assets

Total assets less total liabilities, which equals owners' equity

Net capital loss

Net income

The part of income remaining after all expenses and taxes have been paid.  Also called net profit.

Net income (for tax purposes)

Net tangible assets

Net worth

No par value

When shares of a corporation have no stated face value, they are said to be no par value shares.

No-load fund

This type of mutual fund does not charge sales commissions, but trailer fees are paid annually by the fund to the advisor, broker or dealer where you hold your funds.  A no-load fund may have a higher management expense ratio (MER), to make up for the lack of sales charges.  See also front-end load fund and back-end load fund.

Nominal interest rate

Non-arm's length

Non-capital loss

Non-cumulative

Non-refundable tax credit

The tax rate used to calculate non-refundable tax credit is the lowest federal tax rate, and for provincial/territorial tax credits is the lowest provincial/territorial tax rate, except for Quebec.  Quebec residents calculate their non-refundable tax credits at a rate of 20%.

The unused portions of some non-refundable tax credits can be transferred to another taxpayer.  Some non-refundable tax credits can be used by either spouse.  See our Filing Your Return page for further information on many of these tax credits.

Non-taxable income

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Odd lot

An odd lot is a quantity of shares which is not evenly divisible by a board lot (usually 100 shares).  Shares sold in odd lots are sometimes subject to a price premium.

Office

Open order

An open order is an order to buy or sell stock, which has not yet been filled.

Open-end fund

Mutual funds are also known as open-end funds.  They do not have a fixed number of shares.  The fund issues new shares as investors purchase them, and redeem (buy back) shares as investors sell them.  The price at which the shares are bought and sold is the net asset value (NAV), which is determined at the end of each business day.

See also investment company, closed-end fund, exchange-traded fund, and management expense ratio (MER).

Operating cashflow

Operating cashflow is net income plus depreciation and amortization expenses, plus future income tax expense, and plus or minus changes in working capital.  See also cashflow and free cashflow.

Options - Call options and put options

Outstanding shares

Shares that a company has sold and issued to shareholders, also called "issued" shares.

Over the counter (OTC)

An OTC security is any equity security which is not listed on the major stock exchanges.

OTC securities are not qualified investments for RRSPs.

Overnight rate

The overnight rate is the interest rate at which financial institutions borrow and lend one-day funds to each other.  The target overnight rate is the interest rate set by the Bank of Canada, and is the rate quoted in the press.  See also prime rate and Bank of Canada rate.

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Par value

The par value is the stated face value of a stock or bond.

Partnership

A partnership is a business entity which is created when two or more individuals and/or entities join together to conduct a business, with the goal of making a profit.  The business can be a partnership of individuals, corporations, trusts, other partnerships, or a combination of these.  

In order to form a partnership, an agreement is drawn up which outlines the terms of the partnership.  The terms would include required contributions of capital by each partner, rules governing the management of the partnership, and the method of allocating profits or losses among partners.

Partnerships are regulated by provincial/territorial laws.  In the absence of a partnership agreement, or if certain provisions are not addressed in the agreement, provincial or territorial laws will determine some or all of the terms of the partnership.

A partnership has unlimited liability.  The partners are jointly liable for all debts and other liabilities of the business.  If the business is sued, all the business and personal assets of the partners are at risk.  An exception to this is a Limited Partnership.

Canada Revenue Agency Income Tax Folio S4-F16-C1: What is a Parthership?

See also Should you incorporate your small business?

Passenger vehicle

See the CRA chart of vehicle definitions on the Small Business page.

There are special rules for GST registrants for claiming input tax credits on the purchase of passenger vehicles.  

For income tax purposes, there are limitations on the expenses that can be claimed for a passenger vehicle.  See Auto expenses on the Small Business page.

Pay yourself first

Penny stock

A stock which sells for less than a dollar, and is considered to be speculative.

Pension Plans

Personal services business

Personal-use property

Portfolio

Preferred shares

Preferred shares are a class of corporate capital stock which normally holds priority over common shares in dividend payments, and in distribution of the corporate assets in a liquidation.

See also capital stock.

Prepaid expenses

A prepaid expense occurs when services or supplies are purchased but not used by the end of the accounting period, such as property taxes (if your fiscal year-end is not the same as the year-end for property taxes) and insurance.

For example, the term for insurance is normally one year or longer.  Thus, if the term is one year, but the insurance payment date is not at the end of the fiscal year, then a portion of the insurance cost applies to the next fiscal year.  At the end of the year this portion will show on the balance sheet as a prepaid expense.

Present value

The value today of a payment or series of payments to be made (or received) in the future.  To determine the present value, an interest rate (discount rate) is used.  For example, the present value of a payment of $1,000 to be made in one year, using a 5% discount rate would be $952.38 ($1,000 / 1.05).  In other words, the present value is the amount you need to invest today, at the specified interest rate, to make the specified payment or series of payments in the future.

See our Present Value/Future Value calculator.

Price/book ratio  (P/B)

Market value per share divided by book value per share

Price/cashflow  ratio (P/CF)

Market value per share divided by annual cashflow per share

Price/earnings ratio  (P/E)

Market value per share divided by annual net income per share

Price/free cashflow  (P/FCF)

Market value per share divided by annual free cashflow per share

Price/sales ratio  (P/S)

Market value per share divided by annual sales per share, or total market cap divided by total annual sales.

Primarily

Canada Revenue Agency (CRA) uses "more than 50%" as their guideline to interpret the word "primarily" in the Income Tax Act and the Excise Tax Act.  

Prime Rate

Principal protected notes (PPNs)

Principal residence exemption

Private corporation

Shares of a private corporation are not publicly traded on a stock exchange.  See also Canadian controlled private corporation (CCPC), and public corporation.

Pro rata

In proportion to.  A pro rata refund for a partially fulfilled contract would be for the proportion of the contract which is unfulfilled.

Promissory note

A  written promise to repay an unsecured loan.

Property

Proprietorship

An unincorporated business owned by one person.  For tax purposes, the net income of the proprietorship is reported as self employment income on the owner's personal income tax return.

See also Should you incorporate your small business?

Prospectus

Legal document prepared for potential investors which describes all facets of the securities or property being offered for investment.  This should always be scrutinized carefully by potential investors.  If there is no prospectus provided for a potential investment, you should seek professional advice.

Public corporation

Shares of a public corporation are listed on a stock exchange and can be purchased by the general public.  See also private corporation.

Put options - see Call Options and Put Options

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Quick ratio

The quick ratio is calculated as (cash + marketable securities + receivables) divided by current liabilities.  This ratio is an indicator of the ability of the company to meet current debts.  The rule of thumb is that a quick ratio under 1, or 100%, requires further scrutiny.  The quick ratio is similar to the current ratio, except that the current ratio includes all current assets.  Inventory and prepaid expenses are excluded from the quick ratio calculation.  Comparing the current ratio to the quick ratio gives an indication of the impact of inventory on the company's working capital.

Quote

Real estate investment trust (REIT)

An investment vehicle which allows people to invest in a portfolio of real estate holdings by purchasing units of the trust.  This gives the holders more diversity and liquidity than investing directly in real estate.  REITs are not taxed as corporations, but flow their income through to unitholders.

Recapture of capital cost allowance

Record date

When dividends are declared by a corporation, the dividend announcement includes the amount of the dividend and the record date.  The dividend is paid to shareholders who hold the stock on the record date.  Because it takes 3 days for trades in shares of corporations to be settled, a person must buy the stock at least 3 days prior to the record date (at least the day prior to the ex-dividend date) in order to be entitled to the dividend.  See also trade date and settlement date.

Registered Education Savings Plan (RESP)

Registered Pension Plan (RPP)

Registered Retirement Income Fund (RRIF)

Registered Retirement Savings Plan (RRSP)

Retained earnings/accumulated deficit

The net income, or net profit, generated by a company each year is transferred to Retained Earnings, which is a part of Shareholders' Equity on the balance sheet.  Retained Earnings are the accumulated profits of the company, and show as a positive amount on the balance sheet.  If the company has accumulated losses instead of profits, this is called Accumulated Deficit, and shows up as a negative amount on the balance sheet.

Return on assets  (ROA)

The return on assets is a measure of the company's profitability and efficiency.  It is calculated by dividing the annual operating income (income before interest and taxes) by the average total assets.  The average of total assets can be determined by adding the year's beginning and ending balances of total assets, and dividing by two.

Return on equity  (ROE)

This ratio reflects the profitability of the investment to the common shareholders.  It is calculated by dividing the annual net income less any preferred stock dividend requirements by the average common shareholders' equity during the year.  The average common equity is usually determined by adding the year's beginning and ending balances, and dividing by two.

Return on Investment

Revenue

The amount of sales, rental, interest and other income earned by a business.  The revenue of a business is reported on the income statement.

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Securities

Securities include negotiable financial instruments such as common shares, preferred shares, bonds, debentures, mutual funds, put and call options, warrants, etc.

Segregated funds

A type of mutual fund, sold by insurance brokers, which is guaranteed to return all or part of your initial investment.  Segregated funds may be protected from creditors under certain circumstances.  When a preferred beneficiary is designated, the funds are paid to the beneficiary upon death, avoiding probate.

Self-employment income

On the personal income tax return (T1), the above types of income are reported on lines 135 to 143.  Canada Pension Plan (CPP) premiums must be paid on net self-employment income  The self-employed person pays both the employee and employer portions of the CPP premiums.

Rental income may be classed as property income or as business income, depending mainly on the number and level of services provided in conjunction with the rentals.  When it is classed as property income, it is entered line 126 of the T1 personal tax return.

See also:

Is your income considered rental (property) income or business income?

Are you an employee, or self-employed?

Canada Revenue Agency (CRA) publication T4002 Business and Professional Income Guide.

Settlement date

Share

Shareholder

A shareholder owns stock (shares) in a corporation.  The shareholders are the owners of a corporation.

Shareholders' equity

This consists of all amounts received when shares were issued (share capital), plus retained earnings, less treasury shares, and is shown on the balance sheet portion of a corporation's financial statements.  Also equal to total assets less total liabilities.

Short sales of investments

Small business corporation (SBC)

The Income Tax Act defines a small business corporation as a Canadian controlled private corporation (CCPC), in which all or substantially all of the fair market value of the assets are used principally in an active business carried on primarily in Canada.  The assets  may include shares or debt of one or more other small business corporations that are connected with the corporation.

See $750,000 capital gains deduction on the Small Business page. 

Small business deduction

Small supplier

Specified investment business

Specified shareholder

Speculator

One who will take on additional risk in order to increase returns.

Spread

The difference between bid and ask prices.

Standby charge

The standby charge is an amount included in the income of an employee or shareholder when a company owned or leased automobile is available for the personal use of the employee or shareholder.  See Auto taxable benefits on the Small Business page.

Stock

A certificate representing partial ownership (share) of a company (or a base for making soup).  See also capital stock, common shares, and preferred shares.

Stock dividend

A dividend paid in the form of shares or partial shares of the paying corporation.

Stock exchange

A stock exchange is an organization which is in the business of providing securities trading services.

Stock index

Stock split

This is when a corporation issues additional shares to its shareholders.  For instance, a 2 for 1 stock split would result in each shareholder holding twice the number of shares that they previously held.  However, the market value per share would be only half of the previous market value per share.

Stop loss order

An instruction to a broker to sell a stock if it falls to a specified price.

Street name

A security registered in street name is registered in the name of the brokerage company, not the owner.  This is how most shares are held when purchased through a brokerage company.

Strip bond

Structured products

More caution should be used if the structured product is sold without a prospectus.

Substantially all

Canada Revenue Agency (CRA) uses "90% or more" as their guideline to interpret the words "all or substantially all" in the Income Tax Act and the Excise Tax Act.  

Superficial loss and other disallowed losses.

Surplus

Earned surplus is the same as retained earnings.  See also contributed surplus.

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Target overnight rate

Taxable capital employed in Canada

Taxable capital gain

Taxable income, net income and total income

Technical analysis

Analysis of stocks and markets based on historical trends, in order to predict which trends will continue into the future.  

Terminal loss

Ticker symbol

A ticker symbol is a 1 to 5 letter symbol which is used to represent a security listed on a stock exchange.  The ticker symbol for General Motors, for instance, is GM, and for Intel is INTC.

Times interest earned

Also called interest coverage, times interest earned reflects the ability of the company to pay its interest.  It is calculated as annual operating earnings (income before interest and taxes) divided by annual interest expense.  If the result of this calculation is 2, it means that the company's operating earnings are 2x its interest expense.

Trade date

The trade date for securities transactions is the date the the transaction was entered into.  Payment is made for the transactions on the settlement date.  When the transaction is made in a foreign currency, such as when foreign shares are purchased using a US dollar trading account, for calculating the cost basis in Canadian funds, the exchange rate on the trade date should be used.

See the article What is the tax treatment of different investments? on the Personal Tax page.

Trade deficit

If a country imports more goods and services than it exports, it has a trade deficit.

Trade surplus

If a country exports more goods and services than it imports, it has a trade surplus.

Trader

A person who buys and sells stocks looking for short term profits.

Trailer fees

Mutual funds pay a trailer fee to the advisor, broker, or dealer where you hold your mutual funds.  This annual fee is part of the management expense ratio (MER), so is not a fee that you see being deducted from your account.  See also front-end load fund, back-end load fund, and no-load fund.

Treasury bills (T-bills)

Short term government debt, which is sold to investors at a discount from face value, and matures at face value.

When a treasury bill is held to maturity, the difference between proceeds and adjusted cost base (purchase price) is considered interest income for tax purposes.  If the treasury bill is purchased in one year and matures in the next year, the amount of accrued interest must be calculated at December 31 to include in the income tax return for that year.  If a treasury bill is disposed of prior to maturity, a capital gain or loss may result, as well as the interest income.  Example:

The capital gain or loss is calculated as:

Treasury shares

Shares that have been bought back by the issuing corporation. Shares bought back can be cancelled, or retained as treasury shares.  Treasury shares are issued, but not outstanding, and do not receive dividends or have voting rights.

TTM (trailing twelve months)

Trailing twelve months is usually the total of the last 4 quarters of financial information reported by the company.  Companies produce annual financial statements at the end of their fiscal year, and usually produce interim financial statements every 3 months.

Trustee

An individual or other entity who holds or manages assets for the benefit of others.  Examples are Trust Companies, trustees of income trusts, and executors of wills.

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Uncovered call option

 - See Call Options and Put Options

Uncovered put option

 - See Call Options and Put Options

Undepreciated capital cost (UCC)

The capital cost of a fixed asset (excluding land) is added to a capital cost allowance class when the asset is acquired.  Each year, the allowed capital cost allowance is deducted from the balance in the class, and the remaining amount is called the undepreciated capital cost.

See also recapture and terminal loss.

Underwriting

The distribution of shares or debt of a government or company to investors.

Unincorporated

An unincorporated business, such as a proprietorship, is one which has not gone through the process of being formed into a corporation.

Unlisted stock

A stock that does not trade on a stock exchange, but may be traded over the counter (OTC).

Value investor

A value investor is a person who purchases shares which appear to be a good value based on price/earnings, price/sales, price/book, price/cashflow, debt/equity and other financial ratios.

See also growth investor and momentum investor.

Voting stock

Shares of a corporation which give the shareholder a right to vote on matters pertaining to the corporation.  A corporation may have voting and non-voting stock.

Warrant

The right to purchase shares from the issuing entity, at a set price, usually for a specified period of time.

Wash trade

A wash trade is the activity of buying and selling the same investment in a short period of time (usually on the same day), with no change in beneficial ownership.  Wash trades are illegal when they are done to artificially inflate the trading volume or market value of a stock.

A legal use of wash trades that is beneficial to investors, is the washing of trades of foreign currencies, such as when trades which normally settle in US$ are made in a Canadian$ account such as an RRSP.  These wash trades are used to eliminate the exchange rate difference between purchases and sales of US$ investments.

To learn more about wash trades, see Reduce your foreign exchange costs inside registered accounts by washing trades, on our Stocks and Bonds page.

Weighted average cost

When an investor purchases shares in a single corporation on more than one occasion, the weighted average cost per share is calculated as the total cost of all the shares divided by the total number of shares purchased.

Example:  Investor A purchased shares of Corporation A on three different occasions:

Total cost = $7,587, divided by total shares (400) = weighted average cost of $18.9675/share.

If the investor subsequently sells 100 shares, then the cost basis allocated to the sold shares (for tax purposes) would be $18.9675 x 100, = $1,896.75.  The cost basis of the remaining 300 shares would be $7,587 - $1,896.75 = $5,690.25.

Working capital

Current assets minus current liabilities.  This reflects the company's ability to cover its short term debts.

Working capital ratio

Also called current ratio, this is the current assets divided by the current liabilities.

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Yield

This is a percentage which reflects the annual return on an investment.  See dividend yield.

Revised: November 05, 2024