CSC Volume 2 Summary

defensive industries

An industry with a record of stable earnings and continuous dividend payments and which has demonstrated relative stability in poor economic conditions.

reversal pattern

Chart formations that usually precede a sizeable advance or decline in stock prices.

technical analysis

A method of market and security analysis that studies investor attitudes and psychology as revealed in charts of stock price movements and trading volumes to predict future price action.

moving average

The average of security or commodity prices calculated by adding the closing prices for the underlying security over a pre-determined period and dividing the total by the time period selected.

blue-chip

An active, leading, nationally known common stock with a record of continuous dividend payments and other strong investment qualities.

continuation pattern

A chart formation indicating that the current trend will continue.

efficient market hypothesis

The theory that a stock’s price reflects all available information and reflects its true value.

head-and-shoulders formation

A trend reversal pattern that can occur either at a market top or at a market bottom and consists of a shoulder, a head, and a second shoulder and the breaking of a neckline.

declining industries

An industry that has moved out of the maturity stage and is now growing at rates slower than the overall economy, or has a slowing growth rate.

mature industries

An industry that experiences slower, more stable growth rates in profit and revenue than growth or emerging industries.

growth industry

An industry in which sales and earnings are consistently expanding at a faster rate than in most other industries.

cyclical industry

An industry that is particularly sensitive to swings in economic conditions.

contrarian investors

Which investors use sentiment indicators to determine what the majority of investors expect prices to do in the future so that they can take the opposite position?

cycle analysis

Based on the assumption that price moves in predictable waves; used to forecast when the market will start moving in a particular direction and when it will ultimately reach its peak or trough.

fundamental analysis

Security analysis based on facts about a company as revealed through its financial statements and an analysis of economic conditions that affect the company’s business.

economies of scale

An economic principle whereby the per unit cost of producing each unit of output falls as the volume of production increases.

support level

A price level at which a security stops falling because the number of investors willing to buy the security is greater than the number of investors wishing to sell.

random walk theory

The theory that stock price movements are random and bear no relationship to past movements.

interest coverage ratio

A debt ratio that tests ability of a company to pay interest charges on its debt based on how many times interest is covered by available earnings.

liquidity ratios

Financial ratios that are used to judge the company’s ability to meet its short-term commitments. (working capital ratio, quick ratio)

asset coverage ratio

A financial ratio that shows a company’s ability to cover its debt obligations with its assets after all non-debt liabilities have been satisfied.

working capital ratio

Current assets of a company divided by its current liabilities.

gross profit margin ratio

A profitability ratio that shows the company’s rate of profit after allowing for cost of sales.

cash flow-to-total debt outstanding ratio

A financial ratio that gauges a company’s ability to repay the funds it has borrowed.

risk analysis ratios

Financial ratios that show how well the company can deal with its debt obligations. (asset coverage ratio, debt-to-equity ratio, cash flow-to-total debt outstanding ratio, interest coverage ratio)

dividend discount model

The relationship between a stock’s current price and the present value of all future dividend payments; used to determine the price at which a stock should be selling.

operating performance ratios

Ratios that illustrate how well management is making use of company resources. (gross profit margin ratio, net profit margin ratio, return on common equity ratio, inventory turnover ratio)

inventory turnover ratio

What ratio measures efficiency of a company in selling its inventory? May also be expressed as the number of days required to sell inventory if divided by 365.

financial ratios

Financial calculations based on a company’s financial statements, often providing clues about the company’s financial health.

net profit margin ratio

A profitability ratio that indicates how efficiently the company is managed after taking into account both expenses and taxes.

value ratios

Financial ratios that show the investor the worth of the company’s shares or the return on owning them. (dividend payout ratio, EPS ratio, dividend yield, equity value per common share ratio, P/E ratio)

quick ratio

A ratio that measures liquidity more stringently by excluding inventory to focus on a company’s more liquid assets.

current ratio

A liquidity ratio that shows a company’s ability to pay its current obligations from current assets.

debt-to-equity ratio

A ratio that shows whether a company’s borrowing is excessive.

dividend payout ratio

A ratio that measures the amount or percentage of the company’s profit that is paid out to shareholders in the form of dividends.

trend ratios

What is calculated by selecting a base period, treating the figure or ratio for that period as 100, and then dividing it into the comparable ratios for subsequent periods?

liquidity risk

The type of risk where an investor will not be able to buy or sell a security quickly enough because buying or selling opportunities are limited.

diversification

Spreading investment risk by buying different types of securities in different companies in different kinds of businesses and/or locations.

standard deviation

A statistical measure of risk, expressed as a percentage; the higher the measure for an investment, the greater the volatility of returns and therefore the greater the risk.

real rate of return

A rate of return adjusted for the effects of inflation.

inflation rate risk

The type of risk where the value of financial assets and the purchasing power of income will decline due to the impact of inflation on the real returns produced by those financial assets.

holding period return

A transactional rate of return measure that takes into account all cash flows and increases or decreases in a security’s value for any time frame.

sector rotation

A top-down approach to investment, focusing on analyzing the prospects for the overall economy and investing in those sectors that are expected to outperform.

beta

A measure of the sensitivity (i.e., volatility) of a stock or a mutual fund to movements in the overall stock market.

systematic risk

A non-controllable, non-diversifiable risk that is common to all investments within a given asset class.

default risk

The type of risk where a debt security issuer will be unable to pay interest on the prescribed date or the principal at maturity.

ex-post

The rate of return that was actually received by an investor.

capital loss

The type of gain from selling a security for less than its purchase price.

interest rate risk

The type of risk where changes in interest rates will adversely affect the value of an investor’s portfolio.

capital gain

The type of gain from selling a security for more than its purchase price.

political risk

The type of risk associated with a government introducing unfavourable policies making investment in the country less attractive; also, the general instability associated with investing in a country.

ex-ante

A projection of expected returns – what investors expect to realize as a return.

business risk

The type of risk inherent in a company’s operations, reflected in the variability in earnings.

non-systematic risk

The risk that the price of a specific security or a specific group of securities will change in price to a different degree or in a different direction from the market as a whole.

Sharpe ratio

A ratio measure of the portfolio’s risk-adjusted rate of return using standard deviation as the measure of risk.

investment policy statement

The agreement between a portfolio manager and a client that provides the guidelines for the manager.

tactical asset allocation

An asset allocation strategy that involves adjusting a portfolio to take advantage of perceived inefficiencies in the prices of securities.

dynamic asset allocation

An asset allocation strategy of systematic rebalancing of the securities in the portfolio so that they match the long-term strategic asset mix.

asset allocation

Apportioning investment funds among different categories of assets, such as cash, fixed income securities and equities.

strategic asset allocation

The portfolio’s consistent long-term asset mix.

mutual fund

An investment fund that uses proceeds from redeemable shares and units sold to investors to buy investments.

custodian

A firm that holds the securities belonging to a mutual fund or a segregated fund for safekeeping.

managed product

A pool of capital gathered to buy securities chosen by an investment professional who is paid a fee to make investment decisions.

management expense ratio

The total expense of operating a mutual fund expressed as a percentage of the fund’s net asset value.

Fund Facts

A disclosure document designed to give mutual fund investors key information about a fund.

front-end load

A sales charge applied to the purchase price of a mutual fund when the fund is originally purchased.

F-class fund

A type of fee-based fund with a lower MER designed to accommodate fee-based financial advisors by reducing or eliminating the double charge.

registrar

Appointed by a company to maintain records of who owns the mutual fund’s shares, and is often also the transfer agent.

switching fees

A fee charged by a mutual fund when an investor exchanges units of one fund for another in the same fund company.

active management

What type of fund managers make investment decisions based on their outlook for the markets and securities in which they invest, as opposed to following a passive buy-and-hold strategy?

trailer fee

A fee that a mutual fund manager may pay to the individual or organization that sold the fund for providing services such as investment advice, tax guidance and financial statements to investors.

pre-authorized contribution plan

A pre-authorized plan to make regular purchases in small amounts.

offering price

The total price that an investor pays to purchase shares in a mutual fund.

no-load fund

A fund that does not charge a fee to purchase or redeem units.

simplified prospectus

A condensed prospectus distributed by mutual fund companies upon request to purchasers and potential purchasers of fund units or shares.

passive management

What type of investment manager assumes only the systematic risk associated with investing in a particular asset class?

unsolicited orders

An order initiated by the investor that is not based on advice provided by the advisor.

transfer agent

An agent, usually a trust company, appointed by a corporation to maintain shareholder records, including purchases, sales, and account balances.

ratio withdrawal plan

A withdrawal plan where the investor receives payments from the fund by redeeming a specified percentage of fund holdings each year.

systematic withdrawal plans

A plan that enables set amounts to be withdrawn from a mutual fund or a segregated fund on a regular basis.

Modified Dietz method

A method of fund valuation that weights each cash flow by the length of time it is held in the portfolio, assumes a constant rate of return through period.

dividend funds

A fund that invests in preferred shares as well as high-quality common shares, with a history of consistently paying dividends.

target-date funds

Mutual funds that pursue a growth strategy in early years, holding more risky assets and gradually move towards less risky assets as the maturity date approaches.

peer group

A group of managed products (particularly mutual funds) with a similar investment mandate.

T3 form

The type of form that identifies investment income sent by an unincorporated fund to the investor.

life expectancy-adjusted withdrawal plan

Withdrawal based on periods that are continually readjusted to the changing life expectancy of the plan holder and are designed to deplete the entire investment by the end of the plan.

closet indexing

A fund manager does not replicate the market exactly but sticks fairly close to the market weightings by, for example, sector, country or the average market capitalization.

asset allocation funds

A fund with similar objectives to those of balanced funds, but typically does not have to hold a specified minimum percentage of the fund in any class of investment.

adjusted cost base

The deemed cost of an asset representing the sum of the total amount paid plus any additional costs, such as brokerage fees and commissions.

fixed-dollar withdrawal plan

A type of withdrawal plan where the fund holder chooses a specified dollar amount to be withdrawn on a monthly or quarterly basis.

index fund

A fund that sets out to match the performance of a broad market index, such as the S&P/TSX Composite Index.

equity funds

A fund that must invest a minimum of 90% of their non-cash assets in equity securities.

bond funds

A fund that invests primarily in bonds and derives its income mostly from interest payments made by bond issuers to the fund.

time-weighted rate of return

A measure of return calculated by averaging the return for each subperiod in which a cash flow occurs into a return for a reporting period.

glide path

A term that describes the changes in the target-date fund’s asset allocation mix over time.

balanced funds

A fund that invests in both stocks and bonds to provide a balanced mix of income and capital growth.

inverse ETFs

ETF that seeks to replicate, net of expenses, the inverse performance of a reference index.

covered call ETFs

ETFs that employ covered calls to enhance the yield and reduce the volatility of owning the underlying stock or portfolio.

designated broker

The broker who has a contractual agreement with an ETF company to aid in the creation and redemption of ETF units.

sampling

The process by which the portfolio manager selects a smaller group of securities and their weighting to best match the performance of the overall index.