1. Bank account — A place to put your money and earn a small amount of interest. The two main types are savings accounts and chequing accounts. The money in your bank account, up to a limit of $100,000, is insured by Canada Deposit Insurance Corporation (CDIC).
2. Advisor — A person trained to help you make financial decisions. There are different advisors for investing, financial planning, tax planning, estate planning and insurance, although some advisors may have more than one specialty. Advisors are paid by:
- Commission (usually a percentage of the cost of an insurance or investment product, calculated on a per-product basis)
- Fees (see “Fees”)
- Commission and fees
Advisors work at banks, insurance agencies or independent firms. They must be registered with a securities regulator, such as the Ontario Securities Commission (OSC), or an insurance regulator. A securities regulator is a government organization that makes rules and guidelines and helps enforce them. Most advisors also register with industry organizations that provide some oversight. These self-regulatory organizations are not government agencies, but do uphold certain professional standards. You should ask your advisor how he or she is registered and listen to the explanation carefully.
3. Stock market — A place where shares in companies, also called stocks, are bought and sold. The Toronto Stock Exchange (TSX, www.tsx.com) is Canada’s largest stock market. The TSX is located on Bay Street in downtown Toronto and is owned by TMX Group. The TSX lists companies from Canada and around the world.
4. Capital — Money you have to invest or lend so you can make more money.
5. Principal — An amount of money lent or borrowed. Principal does not include money earned on a loan, or interest paid on a loan.
6. Investment — Something you buy to make money on. Investments include stocks, bonds, mutual funds, real estate, and hard goods or commodities such as gold.
7. Return — The money you make from an investment. Your return can be expressed as a percentage of the cost of the investment. This calculation is called return on investment (ROI). ROI = (return / cost) × 100%.
8. Dividend — A portion of profit paid to investors, or shareholders, of a stock. The dividends you get are based on the amount of stock you own. Often, dividends are paid to you every three months.
9. Fees — Money you pay an advisor or an investment fund. An advisor may charge a fixed fee, an hourly fee to perform work for you, or a fee based on a percentage of your investments. Investment funds, such as mutual funds, have operating expenses and management fees. These are paid from the fund before you get your investment returns.
10. Risk tolerance – a person’s willingness and financial ability to handle drops in the value of his or her investments.
11. Capital gain — The amount you earn when you sell your investment for more than you paid for it. Currently, you pay tax on only 50% of capital gains you earn in a year. Capital gains from the sale of the home you live in are generally not taxed.
12. Portfolio — The collection of your investments. An investment advisor helps you build your portfolio so that your investments are suitable for your risk tolerance (see “Risk tolerance”) but still make money.
13. Diversification — A way to reduce the risk of your portfolio by choosing different types of investments. Economic changes affect each investment differently, so losses on one investment could be balanced by gains on another.
14. Time horizon — The number of years you plan to invest a particular sum. For example, your time horizon for your retirement fund would be the number of years until you retire. Another example: the time horizon for a newborn child’s university fund would be about 18 years.
15. RRSP — A Registered Retirement Savings Plan. This plan helps you save for retirement while reducing taxes. Inside the plan, you can invest in GICs, bonds, stocks, mutual funds and other investments. You pay no tax on your savings and earnings while they stay in the plan. There is a limit on how much money you can invest each year.
16. TFSA — A Tax-Free Savings Account. This account lets you save money, up to a yearly limit, without paying tax on your earnings. Inside the account, you can invest in GICs, bonds, stocks, mutual funds and other investments. Your savings and earnings grow tax-free, even when you remove money from the account. You must be at least 18 and have a social insurance number to open a TFSA.
17. RESP — A Registered Education Savings Plan. This savings plan helps you save, up to a lifetime limit, for a child’s education after high school. Inside the plan, you can invest in GICs, bonds, stocks, mutual funds and other investments. When you put money in the plan, the government may put in money, too, in the form of grants. The money grows tax-free as long as it stays in the plan. Only the child pays tax on the money when it is removed from the plan. To open an RESP, both you and the child must have social insurance numbers.
18. GIC — A guaranteed investment certificate. This investment usually offers a fixed rate of interest over a certain period, often between 30 days and five years. The minimum you can invest is usually $500.
19. Insurance policy — A contract between you and an insurance company in which you agree to pay regular amounts, called premiums, in return for a large, pre-set payment when a particular event occurs. Those events are usually death, property damage or property loss. (For example, you can buy a life insurance policy that pays a sum of money to your family when you die.) The insurance company is doing what’s known as “covering” you in case that event occurs.
20. Pension — A plan that gives you an income during your retirement. Usually, both you and your employer make payments to the plan. There are two main types:
- a defined benefit plan, which promises to pay you a certain income until you die; and
- a defined contribution plan, which promises to protect your payments, but doesn’t promise you a set amount of income.
21. Tax — Money paid to the government when you buy goods or services or when you earn income, including investment income. Canada has a graduated income tax system, which means higher earners are taxed at a higher rate than lower earners. You can reduce your income tax using deductions and credits. Tax is collected by the government’s Canada Revenue Agency (CRA, www.cra-arc.gc.ca). The government uses the money to reduce government debt and pay for roads, national defense, social programs and many other things.
22. Will — A legal document that describes what to do with your money, property and other investments after you die. If you die without a will, a court of law decides what to do with the things you own.
23. Power of attorney — The legal authority you give someone to make decisions for you in certain situations. A power of attorney is useful if you become mentally or physically disabled or if you must leave the country for a long time.
Sources: GetSmarterAboutMoney.ca, Canada Revenue Agency, Financial Consumer Agency of Canada