A guide to decoding investment terminology
WHETHER you hold mutual funds, stocks, bonds or other vehicles in your investment accounts, you will receive regular statements (either paper or online) that provide the value of your holdings and myriad other details and arcane terms.
Do you know what all those terms mean?
Every week I meet someone who isn’t clear on the industry jargon that is, unfortunately, still used on many of these statements. Let’s try to clarify a few of those.
Account type — the labels used could include cash, margin, open, RRSP, RRIF, LIF, TFSA and a few others. “Cash” or “margin” means non-registered or “open,” which tells you that account is not an RRSP, TFSA or other “registered” account. In cash and margin accounts, the investment income is taxable each year. On the other hand, only withdrawals are taxable from registered accounts.
For a TFSA, both investment income and withdrawals are tax-free.
Within all account statements, the terms “balance” or “cash” denote the amount of actual cash balance in that account at month end. The word “cash” is used again, but with a different meaning in this context.
“Margin” is a certain type of nonregistered investment account that has a built-in line of credit, allowing you to purchase investments (or make withdrawals) “on margin,” which means with money borrowed from your investment dealer. It is convenient if you need to make a quick withdrawal, before the sale of a security “settles.”
Most statements start with a portfolio summary on the first page, listing the account types, account numbers and current value of cash and securities. “Securities” in this context means the holdings in which the money is invested, as opposed to the cash balance in the account.
Sometimes repetition causes confusion. For example, statements often provide a summary, then repeat with more detail. The summary totals everything up, while the details repeat those same amounts, but break them down much further.
Some companies refer to the investments or securities as “Positions” or “Holdings.” Statements usually group investments by the asset class, which could be:
• cash and short term
• bonds or fixed income (which may include preferred shares)
• common stock or equities
The last category may be further broken down between Canadian and foreign, and between U.S. and international.
Some statements also list “mutual funds” as a separate asset category, but this is completely unhelpful. A mutual fund could be cash, fixed income, equity or other categories, as it depends on what investments are held within that fund.
In the details portion, the statement names each individual security, though sometimes they use contractions. More detail is always available by looking up the trading symbol.
The statement then shows the quantity (which is the number of shares or units you own of a security, or the face value of bonds) and the current market price. If you multiply the quantity by the price, you should get your current market value.
Many statements also show “book value.” This may be the original amount you paid for the security, although book value is often adjusted over time by things like distributions reinvested into the same security, or by return of capital on trust units.
Account activity — this is the area that tells you what has happened in the month. Sometimes there is a summary first, which is an accounting of changes in your cash balance. In addition, or alternatively, some statements just show the activity details.
The types of account activity include interest and dividends paid by securities into your cash balance, expenses and fees deducted, deposits, withdrawals and trading activity.
This summary just scrapes the surface of all of the terms and jargon used in investing. Over the next few months, we will expand on these and some of the other terms used, with the goal of making you an expert (or at least a very well-informed amateur).
When you have questions about your investments, ask your investment adviser to go through your statements with you. Remember, it’s your money.