Dictionary

BACK-END LOAD OR REDEMPTION CHARGE	This is an amount paid by an investor when redeeming money from an investment fund or an annuity to discourage withdrawals. In many cases, the fee declines each year, for the first seven years, after which time there is no fee. Also called redemption charge or deferred sales charge (DSC). This fee is usually seen with mutual funds.

BALANCE OF PAYMENTS	A system designed to record all of the economic transactions between one country and the rest of the world over a given period of time. It is composed of the current account and the capital account. Theoretically, the current account and capital account should balance each other out. If Canada buys more goods and services than it sells (i.e. has a current account deficit), it has to sell its assets, or go into debt, to finance the spending (i.e. run a capital account surplus).

BALANCE SHEET	A financial statement providing a snapshot of a company’s assets, liabilities and shareholders’ equity as of a specific date.

BALANCED FUND	A fund that invests in a combination of different assets, such as stocks, bonds and cash. Typically, these funds maintain a constant asset mix but will shift allocations based on market conditions and outlook. Similar to an asset allocation fund, however, the investment manager usually has narrower investment ranges for each asset class.

BALANCED INVESTMENT STRATEGY	A means of diversifying a portfolio by investing in different types of securities to appreciate in value, generate income and provide liquidity while avoiding excessive risk.

BALLOON PAYMENT	A large, lump-sum payment due at the maturity of a mortgage, lease, bond, annuity or other series of payments.

BANK	A financial institution engaged in lending money, taking deposits and providing other financial services.

BANKERS' ACCEPTANCE	A short-term negotiable promissory note issued by a non-financial corporation and guaranteed by the issuer’s bank. They are sold at a discount and mature at their face value.

BANK OF CANADA	Canada’s central bank that is responsible for monetary policy, money supply, supporting Canada’s principal systems for clearing and settling and acting as the fiscal agent for the federal government.

BANK RATE	The minimum lending rate of the Bank of Canada. It is the rate applied to short-term loans for institutions that are members of the Canadian Payments Association, such as the Chartered Banks, and to purchase and resale transactions with key investment dealers in the money market. The bank rate is the benchmark used by financial institutions to set their prime rate.

BARBELL STRATEGY	A strategy in which maturities of a portfolio’s fixed income instruments are shaped like that of a barbell and concentrated at two extremes: short-term and long-term. The strategy can be adjusted to emphasize short or long-term bonds depending on whether the investor thinks interest rates will increase or decrease.

BASE RATE	The interest rate that British banks charge their most creditworthy customers. This is the same as the Canadian prime rate.

BASIS POINT (BPS)	One hundredth of one percent, referring to yields or interest rates. For example, if the bank rate declined from 5.45% to 5.35% it went down 10 bps.

BEAR	An investor who thinks that a stock, industry or overall market will decline. A strategy to take advantage of a bear market is to short sell, where an investor borrows a stock to sell and then repurchases it in the future when the price declines. Opposite of bull.

BEAR HUG	A hostile takeover attempt that is so attractive in terms of price and other features that the target company’s directors, who may be opposed for other reasons, must approve the offer, or risk shareholder protest.

BEAR MARKET	A market that is consistently declining. Opposite of bull market.

BEAR STRADDLE	A strategy in which the investor sells both a put and call option on the same security. Also called a short straddle.

BEAR TRAP	The situation that occurs when a bear market reverses its trend while bearish investors, who thought that the market would still decline, sell short. The investors eventually have to cover their short positions by purchasing the securities at a higher price.

BEARER SECURITY	A security, such as a stock or bond, which does not have the owner’s name recorded in the books of the issuing company. The person or corporation possessing the security is deemed to be the owner.

BEARISH	The sentiment that a stock, industry or overall market is about to decline.

BEIGE BOOK	One of three books prepared in advance of each Federal Open Market Committee (FOMC) meeting; it is the only one of the three that is released publicly. The Beige Book is intended to provide FOMC members with an anecdotal look at changes in the economy since the last FOMC meeting. It is released at 2 p.m. ET on the Wednesday just less than two weeks prior to an FOMC meeting.

BELLWETHER	A financial instrument such as a stock or bond that is widely believed to be an indicator of the overall market’s direction. For example, a blue chip stock.

BELOW PAR	When a security’s current market price is less than its face value.

BENCHMARK	A standard unit or index used for the basis of comparison. A universal unit that is identified with sufficient detail so that other similar classifications can be compared as being above, below or comparable to the benchmark standard. For example, the S&P 500 Index is often used as a benchmark for U.S. equity investment funds.

BENCHMARK BOND	A specific issue outstanding within each class of the spectrum of bond maturities. It is considered by the market to be the standard against which all other bonds issued in that class are evaluated.

BENCHMARK INTEREST RATE	The minimum interest rate investors will accept for investing in a non-Treasury security. Also called a base interest rate.

BENEFICIARY	An individual, trustee, estate, foundation or charity that inherits money, securities or property. A beneficiary may be named in an insurance policy, retirement plan, will, trust document or other legal contract.

BENEFIT FORMULA	This is the entitlement employees earn under their defined benefit pension plan during their working tenure with the employer. The final payout is based on percentage points (usually between 1% and 2%) multiplied by number of years of service.

BEST EFFORTS UNDERWRITING	The underwriter agrees to do its best to sell a new security offering to the public, but does not buy the securities outright and does not guarantee that any or all of the issue will be sold. The underwriter acts as an agent for the issuer and receives a commission based on its sales. This type of underwriting is opposed to the "bought deal".

BETA	A statistical measure of sensitivity, or volatility, of the price of a security or investment fund relative to the market. For example, a security with a beta of 1 will have the same volatility as the overall market. A beta greater than 1, represents a greater volatility than the market, while a beta less than 1, represents a less volatile security.

BID PRICE	The highest price a prospective buyer will pay for a given security. Also called bid.

BID/ASK SPREAD	The difference between the bid and ask price of a security. Also called spread.

BLACK SCHOLES OPTION PRICING MODEL	A model, developed by Fischer Black and Myron Scholes, used to calculate an option’s value by including the stock’s price and standard deviation, the risk-free rate of return, the option’s strike price and its expiry date.

BLANKET BOND	Broad insurance carried by brokerages and other financial institutions to provide coverage against losses due to theft or employee dishonesty.

BLENDED AVERAGE ANNUAL RETURN	The average annual return based on the combined performance of all transactions for a stock, mutual fund or portfolio’s entire history.

BLOCK TRADE	A large amount of securities being held or traded as a single unit. The term is most often used to describe a unit of 1,000 shares or more.

BLUE CHIP FUND	A stock-based investment fund that invests in blue chip stocks. Blue chip stocks are typically largecap stocks.

BLUE CHIP STOCKS	High quality, well-known, large, national companies with strong management and solid records of earnings and dividends growth. See Bellwether.

BLUE SKY	A slang term for laws that various Canadian provinces and American states have enacted to protect the public against securities frauds. ‘Blueskyed’ is used to indicate that a new issue has been cleared by a securities commission and may be distributed. The term is said to have originated with a judge who asserted that a particular stock offering had as much value as a patch of blue sky.

BOARD LOT	A standard trading unit that has been determined by stock exchanges. In most cases a board lot consists of 100 shares, however, the number of shares will vary depending on the security price. When the number of shares is less than a board lot, it is referred to as an odd lot or broken lot.

BOARD OF DIRECTORS	A committee elected by the company’s shareholders to oversee the management of the corporation. The members of the Board of Directors are compensated in cash and/or stock, meet several times annually and assume legal responsibility for the company’s activities. Boards normally include the top corporate executives, termed inside directors and outside directors chosen from both business and from the community at large to advise on matters of broad corporate policy.

BOLLINGER BANDS	A technical analysis technique that plots lines two standard deviations above and below a moving average. Since standard deviation is a measure of volatility, the bands widen during volatile markets and contract during calmer markets. A market approaching the upper band is considered overbought while a market approaching the lower band is considered oversold.

BOND	A long-term debt instrument, greater than 1 year, that has a legal obligation to pay a specified amount of interest and return the principal amount at a specified maturity date. The federal government, provinces, municipalities and corporations issue bonds to raise capital. Corporations generally pledge assets as security for the bond. Government bonds have the backing of the appropriate tax base.

BOND DISCOUNT	See Discount.

BOND EQUIVALENT YIELD	A restating of the yield on a debt instrument in terms of semi-annual interest. This allows for a direct comparison to an interest-bearing coupon bond.

BOND FUND	An investment fund that primarily invests in bonds with the objective of providing stable income and some capital appreciation. Such funds may specialize in a particular kind of bond such as government, corporation, high yield or foreign bonds.

BOND MARKET	The market for all types of fixed income securities, whether traded over-the-counter or through an exchange. The primary market relates to new issues while the secondary market is for subsequent transactions.

BOND RATING	A measure of the quality and safety of a bond based on the financial strength of the issuer. Bond rating agencies such as DBRS, Standard & Poor’s and Moody’s, provide a specific evaluation of the likelihood that the issuer will meet its scheduled interest and principal payments. AAA is the highest credit rating, indicating highly unlikely to default, and D is the lowest credit rating, indicating currently in default.

BOND SWAP	The simultaneous sale of one bond and purchase of another. This is done to extend maturities or for tax considerations.

BOOK-TO-BILL RATIO	The book-to-bill ratio is the ratio of business "booked" (orders taken) to business "billed" (products shipped and bills sent). A book-to-bill of 1.0 implies incoming business = outgoing product. Often in economic downturns, the book-to-bill ratio drops to 0.9, sometimes even lower. A book-to-bill ratio of 1.1 or higher is very positive for a company.

BOOK VALUE	(1) The common shareholders’ equity in a company, equal to total assets less liabilities, preferred shares and contributed surplus. (2) The value of an asset on a company’s balance sheet. This is the original cost less accumulated depreciation. (3) For a portfolio, book value represents the initial cost, plus income distributions, less redemptions.

BOTTOM FISHER	An investor who purchases stocks after they have dropped dramatically.

BOTTOM LINE	Net profit or net earnings of a company.

BOTTOM-UP MANAGEMENT STYLE	An investment strategy that places more emphasis on a company’s history, management, performance and growth potential rather than general economic, market or industry trends.

BOUGHT DEAL	An offering in which the underwriter buys all the shares or bonds of an issue in an attempt to profit from the resale. The underwriter assumes the risk of reselling at a lower price than the one originally paid. This type of underwriting is opposed to "best efforts underwriting".

BREAK-EVEN ANALYSIS	A calculation of the approximate sales volume required to cover both fixed and variable costs, below which production would be unprofitable and above which it would be profitable.

BROAD-BASE INDEX	An Index used to indicate the performance of the entire market, such as the S&P 500 or the Wilshire 5000 Equity Index.

BROKEN IPO	When the price of a new issue falls below its initial offering price.

BROKER	An agent who acts as an intermediary handling transactions to purchase and sell securities, commodities or other property. Generally a commission is charged for this service and a license is required for the products sold. Also called brokerage.

BROKERAGE	A business that employs brokers to enact transactions between securities sellers and buyers. There are three types of brokerages: full-service brokerages, discount brokerages and deep-discount brokerages.

BUBBLE	A period of time when there are rapidly rising stock prices, usually in a particular sector, which investors believe to be unjustified. It is expected that stock prices will reach a certain unsustainable point and then collapse.

BUCKET SHOP	An unlicensed or illegally operated brokerage house. They will participate in the illegal activity of executing client transactions for their own account rather than the market, in the hopes of profiting from a future offsetting transaction.

BULL	An investor who thinks that a stock, industry or overall market will rise. Opposite of a bear investor.

BULLET STRATEGY	A portfolio strategy in which maturities of fixed income securities are highly concentrated at one point of the yield curve.

BULLISH	The sentiment that a stock, industry or overall market is about to rise.

BULL MARKET	A market that is consistently trending upwards. Opposite of a bear market.

BULL SPREAD	An option strategy designed to profit from a rise in a security's price by employing one of the following three bull-spread strategies: vertical spread, calendar spread or diagonal spread.

BULL STRADDLE	A strategy in which the investor buys both a put and call option. Also called a long straddle.

BURN RATE	The rate of a company’s negative cash flow, usually per month.

BUSINESS CYCLE	The long-term pattern of the economy through successive stages of recovery and recession characterized by changing employment, productivity, inflation and interest rates.

BUSINESS MODEL	A description of the future operations, functions and expected revenues and expenses of a business.

BUSTED CONVERTIBLE	A convertible security for which the market price of the common stock is so low that the convertible feature is nearly worthless, and the security trades almost as if it were a fixed income instrument.

BUTTERFLY SPREAD	An options strategy involving transactions on four options with one expiration date. For a call strategy, the investor purchases one option at a low strike price, one option at a high strike price and sells two options at the middle strike price. For a put strategy, the transactions are reversed. The investor profits the most when the price of the underlying security remains near the middle price. The call option at the high strike price, or the put option at the low strike price, limit the potential loss if the options that were sold are exercised.

BUY AND HOLD	An investment strategy in which securities that are purchased are held for a long period regardless of price fluctuations. This strategy can reduce commissions from trading and defer taxes by limiting realized capital gains.

BUYING ON MARGIN	Buying securities with the credit available through a relationship with a broker, using the bought securities as collateral. This can be a risky strategy as it can magnify losses and is subject to "margin calls" by the broker if the account value declines below the required margin level.

BUY-SIDE ANALYST	An analyst employed by a company, such as an investment management firm investing for its clients accounts. For example, KBSH Capital Management Inc. employs buy-side analysts. Research developed by buy-side analysts is usually proprietary and unavailable outside of the firm that employs them.

BUYER'S MARKET	A market that has more sellers (supply) than buyers (demand), leading to lower prices. Also called a soft market.