....

because everyone deserves financial awareness

INVESTMENT TERMS
TABLE OF TERMS
Stock Market Investing Terms.....................................................................3

Property Investing Terms..............................................................................9

Mortgage Terms.......................................................................................... 17

Home Equity Terms................................................................................... 23

Financial Advisor Terms............................................................................. 28

Private Equity Terms................................................................................... 33

GLOSSARY OF

STOCK
INVESTMENT
TERMS
 GLOSSARY OF STOCK INVESTMENT TERMS
A allocation is determined by your return objectives,
Adjusted cost base (ACB): the book value of a
security based on the initial investment cost,
additional contributions and reinvested amounts.
The ACB is used to determine a security’s cost for
tax purposes
Alpha: the amount by which a money manager’s
performance exceeds his or her benchmark index
Annuity: an insurance product that makes monthly
payments for a specified period, or for life. An
annuity may be suitable for those who have no
pension or are concerned about outliving their
money
Arbitrage: the practice of buying an asset in one
market and selling the same asset in another. The
goal is to profit from a temporary difference in
prices, currency exchange rates or the like
Ask price: the lowest price potential sellers are
willing to accept for a stock. The ask price is always
higher than the bid price
Asset allocation: a portfolio’s mix of equities, fixed
income, cash and other asset classes. Your asset
risk tolerance, income needs, and other factors
B
Beta: a measure of the volatility of a stock (or
portfolio of stocks) and how closely it correlates
with the overall market bID price: the highest price
potential buyers are willing to pay for a stock. The
bid price is always less than the ask price
Bid-ask spread: the difference between a stock’s
current bid price and ask price. Stocks with a wide
bid-ask spread are more expensive to trade
Buy and hold: a disciplined investing strategy that
is based on holding stocks and other assets in your
portfolio for a long period of time, regardless of the
ebbs and flows of the market
C
Call option: a contract that gives you the right, but
not the obligation, to buy a stock at a specified
price within a certain time frame
Capital asset pricing model (CAPM): a financial
model that attempts to describe the relationship
between an investment’s risk and its expected rate
of return
Capital gain (loss): the difference between the
price you receive when selling an asset and its
adjusted cost base. A capital gain is the profit you
make when you sell a stock for more than you paid.
A capital loss occurs when you sell for less than
you paid. Capital gains are taxed at half the rate of
regular income, and they can be offset with capital
losses
Common share: a security representing part
ownership of a company. Common shareholders
can normally vote for the board of directors and are
entitled to approved dividends after bondholders
and preferred shareholders. See also preferred
share
D divided by the number of shares outstanding
Deemed disposition: the assumed sale of an asset
for tax purposes, even if no actual sale has taken
place. For example, when you die, cease to be a
Canadian resident, or transfer stocks from a non-
registered account to a registered account, capital
gains taxes may be payable just as if you had sold
the stocks
Discount brokerage: a firm that allows you to
buy and sell securities (online or by phone) at a
lower cost than a full-service brokerage. Discount
brokerages are not usually allowed to provide
advice on securities: they simply take your order
and execute
Diversification: the practice of spreading out
investments across different securities, sectors and
asset classes in order to reduce risk
Dividend: a distribution paid to a company’s
shareholders. Dividends are payable to the holders
of preferred shares according to set formula, and to
common shareholders when approved by the board
of directors
Dividend reinvestment plan (DRIP): an arrangement
whereby an investor can receive dividends in the
form of new shares rather than in cash. DRIPs
can be set up directly with certain companies, or
through a brokerage. Participating in a DRIP allows
your investment to compound more quickly
Dividend tax credit: a credit you can claim on your
tax return that reduces the amount of tax you pay
on dividends from Canadian companies
Dollar-cost averaging (DCA): the practice of
investing equal amounts of money at regular
intervals instead of a lump sum. Dollar-cost
averaging reduces the risk of making an ill-timed
investment decision
E
Earnings per share (EPS): a company’s net income
Emerging markets: countries whose stock markets
are considered less developed, such as China, India,
Brazil and Russia
Exchange-traded fund (ETF): an investment
fund that holds a basket of stocks, bonds or
other securities and trades on a stock exchange.
Traditional ETFs are index funds, which offer a low-
cost way of building a diversified portfolio without
selecting individual stocks or bonds
F
Fair market value (FMV): the price an asset is worth
in the marketplace
Fixed income: assets such as bonds and GICs that
pay a fixed rate of interest to the investor
Full-service brokerage: a firm that buys and sells
stocks on your behalf and offers professional
advice on investments. Accordingly, full-service
brokerages charge higher fees than discount
brokerages
Fundamental analysis: a method of evaluating
stocks by looking at a company’s earnings, sales,
profits and related factors
G
Gross domestic product (GDP): the value of all
goods and services produced in a country
Gross-up: the amount that must be added to eligible
Canadian dividends before reporting them as
income. The gross-up for the 2012 tax year is 38%,
which means $100 in Canadian dividends must be
reported on your tax return as $138 in income. The
dividend tax credit then applies to this grossed-up
amount
Guaranteed Investment Certificate (GIC): an
investment sold by a financial institution that pays
a fixed rate of interest for a set period, usually one
to five years. GICs are normally guaranteed by the
federal or provincial government
I buying stocks that have recently risen in value and
Index: a selected number of stocks or bonds used
to represent an asset class or segment of the
market. For example, the S&P/TSX Composite
Index is made up of approximately 260 stocks
and is frequently considered a proxy for the entire
Canadian stock market
Index fund: a mutual fund or ETF that attempts
to match the returns of an asset class or market
segment by holding all the stocks or bonds in an
index
L Overweighting: the decision to hold a significant
Large-cap stock: a public company with a large
market capitalization. While there are no hard rules,
the cutoff for U.S. companies is often considered
$10 billion. In Canada, companies may be
considered large caps when they reach $3 billion or
so. See also small-cap stock
M whether a dividend is sustainable
Margin account: an investment account with a
discount or full-service brokerage that allows you to
buy stocks on credit
Marginal tax rate (MTR): the amount of tax you pay
on the next dollar you earn, which varies according
to your income and the province you live in
Market capitalization: a company’s stock price
multiplied by the number of outstanding shares
Market order: an order placed on a stock exchange
to buy or sell a stock at the current market price
Market timing: an investing strategy that involves
making buying and selling decisions based on your
expectations of how the markets will perform in the
near future. The term usually refers to moving from
stocks to cash and vice-versa, based on technical
indicators or market forecasts
Momentum investing: a strategy that involves
avoiding (or selling short) stocks that have recently
declined. Decisions are usually based on three- to
12-month time frames
N
Non-registered account: an investment account
that is not sheltered from taxes. Also known a
taxable or open account. See also registered
account
O
portion of a portfolio in one sector or stock you
believe will outperform
P
Payout ratio: the proportion of a company’s
earnings paid to shareholders in the form of
dividends. The payout ratio can help you determine
Price-to-book (P/B) ratio: the ratio of a company’s
share price to its book value (tangible assets minus
liabilities). A low P/B ratio may indicate a stock is
undervalued
Price-to-earnings (P/E) ratio: the ratio of a com-
pany’s share price to the previous 12 months’
earnings per share. A low P/E ratio may indicate a
stock is undervalued
Preferred share: a security providing the investor
with a fixed dividend that must be paid before
dividends to common shareholders. If a company
is liquidated, preferred shareholders rank ahead
of common shareholders but behind bondholders.
Canadian preferreds receive favorable tax treatment
in taxable accounts. See also common share
Price-to-cash-flow ratio: the ratio of a stock’s price
to the amount of cash generated by the company
Put option: a contract that gives you the right, but
not the obligation, to sell a stock at a specified price
within a certain time frame
R the S&P/TSX SmallCap Index sets the range at $150
Registered account: any of several investment
accounts that offer some form of tax sheltering,
such as a Registered Retirement Savings Plan
(RRSP) or a Tax-Free Savings Account (TFSA)
Registered retirement savings plan (RRSP): an
investment account that allows you to save for your
retirement on a tax-deferred basis. Contribution
limits are set according to your income and are
tax-deductible. All growth and income accumulates
tax-free in the account until you withdraw it
Registered retirement income fund (RRIF): an
investment account that allows you to shelter
growth from taxes during retirement but also
requires minimum annual withdrawals
Return of capital (ROC): a payment made by a
company, trust, or mutual fund that (unlike a
dividend or interest payment) consists of part of
your original investment being returned to you.
Return of capital is not taxable when it is received,
but it lowers the adjusted cost base of your
investment, which may result in a capital gain in the
future
Risk-free rate: a rate of return that can be achieved
by a safe investment, such as Treasury bills. The
risk-free rate is used in the Capital Asset Pricing
Model to determine the additional return you should
expect from a risky investment
S
Security: a tradable financial instrument such as a
stock, bond or option
Short selling: a technique whereby an investor
borrows a stock and then sells it, with the intention
of repurchasing it later at a lower price. Short sellers
hope to make a profit on stocks they believe will fall
in value
Small-cap stock: a public company with a small
market capitalization. While there are no hard rules,
million to $1.5 billion. See also large-cap stock
Stock: a security that grants partial ownership of a
company to an investor. Stockholders typically have
voting rights and are kept informed of the firm’s
assets and earnings. Some companies also pay
dividends (a percentage of the company’s earnings)
to their shareholders
Stock purchase plan: a program that allows
investors to purchase a company’s shares directly,
without a brokerage, and often at a discount
Stock split: a decision by a company to increase
its number of shares outstanding while keeping the
total value of those shares the same. For example,
if a company announces a two-for-one stock split,
a shareholder who had 100 shares worth $50 each
would end up with 200 shares valued at $25 each
Strike price: the price at which an option holder can
buy or sell a stock

T
Tax-free savings account (TFSA): an investment
account that allows all growth and income to
accumulate tax-tree. Contributions receive no tax
deduction but all withdrawals can be made tax-free.

Technical analysis: a method of trying to predict the

stock market’s future performance based on past
changes in price and trading volume

Ticker symbol: a one- to five-letter symbol used to

identify a company on a stock exchange

V
Value stocks: companies that appear to be
underpriced based on a number of fundmental
factors, such as low price-to-earnings and price-to-
book ratios or high dividend yield

Y
Yield: the income generated by a stock or bond. A
stock’s yield is its annual cash dividends divided by
its current price
GLOSSARY OF

INVESTMENT
PROPERTY
TERMS
 GLOSSARY OF INVESTMENT PROPERTY TERMS
A ASSEMBLAGE: The combining of two or more
ADJUSTED COST BASE (ACB): The value of the
real property established for tax purposes. It
is the original cost plus any allowable capital
improvements, plus certain acquisition costs, plus
any mortgage interest costs, less any depreciation.
ADJUSTED SALE PRICE: The figure produced
when the transaction price of a comparable sale is
adjusted for elements of comparison.
AMORTIZATION: The reduction of a loan through
periodic payments in which interest is charged only
on the unpaid balance.
AMORTIZATION PERIOD: The actual number of
years it will take to repay a mortgage loan in full.
This can be well in excess of the loan’s term. For
example, mortgages often have five-year terms but
25-year amortization periods.
ANTICIPATION: The perception that value is created
by the expectation of benefits to be derived in the
future.
parcels, usually but not necessarily contiguous, into
one ownership or use.
B
BALANCE: The principle that real property value is
created and sustained when contrasting, opposing,
or interacting elements are in a state of equilibrium.
C
CANADA MORTGAGE AND HOUSING CORPORATION
(CMHC): The federal Crown corporation that
administers the National Housing Act. CMHC
services include providing housing information and
assistance, financing, and insuring home-purchase
loans for lenders.
CANADIAN REAL ESTATE ASSOCIATION (CREA): An
association of members of the real estate industry,
principally real estate agents and brokers.
CAPITAL BUDGET: An estimate of costs to
cover replacements and improvements, and the
corresponding revenues needed to balance them,
usually for a 12-month period.
CAPITALIZATION RATE (CAP): The percentage of
return on an investment when purchased on a free-
and-clear or all-cash basis.
CAPITAL RECOVERY: The return to investors of that
portion of their property investment expected to be
lost over the income projection period.
CAPITAL RECOVERY RATE: The return of invested
capital, expressed as an annual rate; often applied
in a physical sense to wasting assets with a finite
economic life.
CASH EQUIVALENCY ANALYSIS: The procedure
in which the sale prices of comparable properties
sold with atypical financing are adjusted to reflect
typical market terms.
COMPARABLES: A shortened term for similar
property sales, rentals, or operating expenses used
for comparison in the valuation process.
COMPARATIVE UNIT METHOD: A method used to
derive a cost estimate in terms of dollars per unit
of area or volume based on known costs of similar
structures that are adjusted for time and physical
differences.
COMPETITION: The active demand for real estate by
two or more market participants.
CONSIDERATION: The recorded price for which title
to a property is transferred.
CONVENTIONAL LOAN: A mortgage that is neither
insured nor guaranteed by an agency of the federal
government, although it may be privately insured.
COST INDEX: A multiplier used to translate a known
historical cost into a current cost estimate. cost
to cure. The cost to restore an item of deferred
maintenance to new or reasonably new condition.
CURABLE FUNCTIONAL OBSOLESCENCE: An
element of accrued depreciation; a curable defect
caused by a flaw in the structure, materials, or
design.
CURABLE PHYSICAL DETERIORATION: An element
of accrued depreciation; a curable defect caused by
deferred maintenance.
D
DEBT COVERAGE: The ability of a property to meet
its debt service out of net operating income.
DEBT/EQUITY RATIO: The ratio between an
enterprise’s loan capital and its equity capital.
DEBT SERVICE: The periodic payment that covers
interest on, and retirement of. the outstanding
principal of the mortgage loan.
DEED: This document conveys the title of the
property to the purchaser. Different terminology
may be used in different provincial jurisdictions.
DEFERRED MAINTENANCE: Curable, physical
deterioration that should be corrected immediately,
although work has not commenced.
DEPRECIATION: 1) In appraising, a loss in property
value from any cause; 2) In regard to improvements,
depreciation encompasses both deterioration and
obsolescence.
DIRECT CAPITALIZATION: A method used to convert
an estimate of a single year’s income expectancy
into an indication of value in one direct step, either
by dividing the income estimate by an appropriate
rate or by multiplying the income estimate by an
appropriate factor.
DISCOUNTED CASH FLOW ANALYSIS: The
procedure in which a discount rate is applied to a
set of projected income streams and a reversion.
The analyst specifies the quantity, variability, timing,
and duration of the income streams as well as the
quantity and timing of the reversion and discounts
each to its present value at a specified yield rate.
E fraction of the investment that is unencumbered by
EASEMENT: An interest in real property that
conveys use, but not ownership, of a portion of an
owner’s property.
ECONOMIC AGE LIFE METHOD: A method of
estimating accrued depreciation in which the ratio
between the effective age of a building and its total
economic life is applied to the current cost of the
improvements to obtain a lump sum deduction.
ECONOMIC LIFE: The period over which
improvements to real property contribute to
property value.
EFFECTIVE AGE: The age indicated by the condition
and utility of a structure.
EFFECTIVE GROSS INCOME (EGI): The anticipated
income from all operations of the real property after
an allowance is made for vacancy and collection
losses.
EFFECTIVE GROSS INCOME MULTIPLIER: The ratio
between the sale price (or value) of a property and
its effective gross income.
EFFECTIVE INTEREST RATE: Interest per dollar per
period; the nominal annual interest rate divided by
the number of conversion periods per year.
EQUITY: The difference between the price for
which a property could be sold and the total debts
registered against it.
EQUITY CAPITALIZATION RATE: An income rate
that reflects the relationship between a single
year’s pretax cash flow expectancy and the equity
investment.
EQUITY DEBT RATIO: The ratio of the equity value or
equity capital invested in a property to the amount
of debt incurred on that property.
EQUITY RATIO: The ratio between the down
payment paid on a property and its total price; the
debt.
EQUITY RETURN: The percentage ratio between an
owner’s equity in the property and the total of cash
flow plus mortgage principal reduction.
ESCALATION CLAUSE: A clause in an agreement
that provides for the adjustment of a price or rent
based on some event or index.
ESTATE: A right or interest in property. excess land.
The land not needed to accommodate the site’s
highest and best use.
EXCESS RENT: The amount by which contract rent
exceeds market rent at the time of the appraisal;
created by a lease favorable to the landlord.
EXPENSE RATIO: The ratio of total expenses,
excluding debt service, to either potential or
effective gross income.
EXTERNALITIES: The principle that economics
outside a property have a positive effect on its
value while diseconomies outside a property have a
negative effect upon its value.
EXTERNAL OBSOLESCENCE: An element of accrued
depreciation; a defect, usually incurable, caused
by negative influences outside a site and generally
incurable on the part of the owner, landlord, or
tenant.
F
FEE SIMPLE ESTATE: Absolute ownership
unencumbered by any other interest or estate,
subject only to the limitations imposed by the
governmental powers of taxation, eminent domain,
police power, and escheat.
FIXED EXPENSES: Operating expenses that
generally do not vary with occupancy and which
prudent management will pay whether the property
is occupied or vacant.
FUNCTIONAL UTILITY: The ability of a property or
building to be useful and to perform the function for
which it is intended according to market tastes and
standards; the efficiency of a building’s use in terms
of architectural style, design and layout, traffic
patterns, and the size and type of rooms.
G I
GRANTEE: A person to whom property is transferred
by deed or to whom property rights are granted by a
trust instrument or other document.
GRANTOR: A person who transfers property by deed
or grants property rights through a trust instrument
or other document.
GROSS BUILDING AREA: The total floor area of a
building, including below grade space but excluding
unenclosed areas, measured from the exterior of the
walls.
GROSS INCOME MULTIPLIER: The ratio between
sale price or value and potential or effective annual
gross income.
GROSS LEASABLE AREA: The total floor area
designed for the occupancy and exclusive use of
tenants.
GROSS LEASE: A lease in which the landlord
receives stipulated rent and is obligated to pay all or
most of the property’s operating expenses and real
estate taxes.
GROSS RENT MULTIPLIER: The relationship or ratio
between the sale price or value of a property and its
gross rental income.
H
HIGHEST AND BEST USE: The reasonably probable
and legal use of vacant land or an improved
property, which is physically possible, appropriately
supported, financially feasible, and that results
in the highest value. The four criteria the highest
and best use must meet are: legal permissibility,
physical possibility, financial feasibility, and
maximum profitability.
HOLDING PERIOD: The term of ownership of an
investment.
INCURABLE FUNCTIONAL OBSOLESCENCE: An
element of accrued depreciation; a defect caused
by a deficiency or super adequacy in the structure,
materials, or design, which cannot be practically or
economically corrected.
INCURABLE PHYSICAL DETERIORATION: An
element of accrued depreciation; a defect caused
by physical deterioration that cannot be practically
or economically corrected.
INSURABLE VALUE: 1) The portion of the value of
an asset or asset group that is acknowledged or
recognized under the provisions of an applicable
loss insurance policy. 2) Valued used by insurance
companies as the basis for insurance .
INTERIM USE: The temporary use to which a site or
improved property is put until it is ready to be put to
its future highest and best use.
INTERNAL RATE OF RETURN: The annualized yield
rate of return or rate of return on capital that is
generated or capable of being generated within an
investment or portfolio over a period of ownership.
L
LAND TO BUILDING RATIO: The proportion of land
area to gross building area.
LAND RESIDUAL TECHNIQUE: A capitalization
technique in which the net operating income
attributable to the land is isolated and capitalized
to indicate the land’s contribution to total property
value.
LEASE: A written document in which the rights to
use and occupy land or structures are transferred
by the owner to another for a specified period of
time in return for a specified rent.
LEASED FEE ESTATE: An ownership interest held
by a landlord with the rights of use and occupancy
conveyed by lease to others.
LEASEHOLD ESTATE: The interest held by the
lessee (the tenant or renter) through a lease
conveying the rights of use and occupancy for a
stated term under certain conditions.
LOAN TO VALUE RATIO: The ratio between a
mortgage loan and the value of the property
pledged as security; usually expressed as a
percentage.
M if all the units were occupied.
MARKET RENT: The rental income that a property
would most probably command in the open market;
indicated by the current rents paid and asked for
comparable space as of the date of the appraisal.
MULTIPLE LISTING SERVICE (MLS): A service
licensed to member real estate boards by the
Canadian Real Estate Association. Used to compile
and disseminate information by publication and
computer concerning a given property to a large
number of agents and brokers.
MORTGAGE CONSTANT: The capitalization rate
for debt; the ratio of the annual debt service to the
principal amount of the mortgage loan.
N income expectancy or an annual average of several
NET LEASE: A lease in which the tenant pays all
property operating expenses in addition to the
stipulated rent.
NET OPERATING INCOME: The actual or anticipated
net income that remains after all operating
expenses are deducted from effective gross
income, but before mortgage debt service and book
depreciation are deducted.
NOMINAL INTEREST RATE: A stated or contract
rate; an interest rate, usually annual, that does not
necessarily correspond to the true or effective rate
of growth at compound interest.
O
OBSOLESCENCE: One cause of depreciation; an
impairment of desirability and usefulness caused
by new inventions, changes in design, improved
processes for production, or other external factors
that make a property less desirable and valuable for
a continued use.
OCCUPANCY RATE: The relationship or ratio
between the income received from the rented units
in a property and the income that would be received
OPERATING BUDGET: An estimate of costs to
operate a building or condominium complex and
corresponding revenues needed to balance them,
usually for a 12-month period.
OPERATING EXPENSE RATIO: The ratio of total
operating expenses to effective gross income.
OPERATING EXPENSES: The periodic expenditures
necessary to maintain the real property and
continued production of the effective gross income,
assuming prudent and competent management.
OVERALL CAPITALIZATION RATE: An income rate
for a total real property interest that reflects the
relationship between a single year’s net operating
years’ income expectancies and total property price
or value; used to convert net operating income into
an indication of overall property value.
P
PAIRED DATA ANALYSIS: A quantitative technique
used to identify and measure adjustments to the
sale prices or rents of comparable properties; to
apply this technique, sales or rental data on nearly
identical properties are analyzed to isolate a single
characteristic’s effect on value or rent.
PYRAMIDING: The process of building real estate
wealth by allowing appreciation and mortgage
principal reduction to increase the investors’ equity
in a series of ever larger properties.
R the sandwich lease is neither the fee owner nor the
REMAINING ECONOMIC LIFE: The estimated
period during which improvements will continue to
contribute to property value.
REPLACEMENT ALLOWANCE: An allowance that
provides for the periodic replacement of building
components that wear out more rapidly than the
building itself and must be replaced during the
building’s economic life.
REPLACEMENT COST: The estimated cost to
construct, at current prices as of the effective
appraisal date, a building with utility equivalent
to the building being appraised using modem
materials and current standards d i d layout.
RESIDUAL TECHNIQUES: Procedures used to
capitalize the income allocated to an investment
component of unknown value after all investment
components of known values have been satisfied.
REVERSION: A lump sum benefit that an investor
receives or expects to receive at the termination of
an investment; also called reversionary benefit.
REVERSION FACTOR: A compound interest factor
that is used to discount a single future payment to
its present worth, given the appropriate discount
rate and discount period.
RISK FACTOR: The portion of a given return or rate
of return from capital invested in an enterprise that
is assumed to cover the risks associated with the
particular investment.
S
SALE/LEASEBACK: A financing arrangement in
which real property is sold by its owner/user, who
simultaneously leases the property from the buyer
for continued use.
SANDWICH LEASE: A lease in which an
intermediate, or sandwich, leaseholder is the lessee
of one party and the lessor of another. The owner of
user of the property; he or she may be a leaseholder
in a chain of leases, excluding the ultimate
sublessee.
SUBLEASE: An agreement in which the lessee in a
prior lease conveys the right of use and occupancy
of a property to another, the sublessee.
SUBSTITUTION: The appraisal principle that
states that when several similar or commensurate
commodities, goods, or services are available, the
one with the lowest price will attract the greatest
demand and widest distribution.
SUPPLY AND DEMAND: In real estate appraisal
context, the principle of supply and demand states
that the price of real property varies directly, but
not necessarily proportionately, with demand and
inversely, but not necessarily proportionately, with
supply.
T
TITLE INSURANCE: This insurance covers the
purchaser or vendor, in case of any defects in the
property or title, that existed at the time of sale but
were not known until after the sale.
U
UNITS OF COMPARISON: The components into
which a property may be divided for purposes of
comparison; e.g., price per square foot, front foot,
cubic foot, room, bed, set, apartment unit.
V
VARIABLE EXPENSES: Operating expenses that
generally vary with the level of occupancy or the extent
of services provided.

VENDOR TAKE-BACK: A procedure wherein the seller

(vendor) of a property provides some or all of the
mortgage financing in order to sell the property. Also
referred to as vendor financing.

Y
YIELD CAPITALIZATION: The capitalization method
used to convert future benefits into present value by
discounting each future benefit at an appropriate yield
rate or by developing an overall rate that explicitly
reflects the investment’s income pattern, value change,
and yield rate.
GLOSSARY OF

MORTGAGE
TERMS
 GLOSSARY OF MORTGAGE TERMS
A and property you own. Your liabilities may include
Adjustable Rate Mortgage
In an adjustable rate mortgage, the interest rate
and monthly payments fluctuate based on market
interest rates. As the interest rate adjusts up or
down, payment amounts adjust accordingly so that
the amortization period remains the same. This
method should be used carefully, as changes in
payment amounts could present an issue for those
on a tight budget.
Amortization Period
This is the period of time that it will take for you
to repay your mortgage in full, typically ranging
from 15 to 25 years. A longer amortization period
will result in lower payments, but you’ll also end
up paying more in interest over the length of the
mortgage. A shorter period results in less interest
paid as well as higher payments. It’s wise to choose
the shortest amortization period you can afford.
Assets and Liabilities
Assets include your checking and savings account
balances, RRSP and investment balances, vehicles,
other mortgage, credit card debt, and outstanding
loans. When you apply for a mortgage, your assets
(less your liabilities) are taken into account to
determine whether you can afford your monthly
payments.
B
Bridge Financing
Bridge financing is a form of credit that bridges the
time between when you need financing and when
long-term financing can be secured. Often used
as funding between the sale of one property and
the purchase of another, this short term solution is
best used with the help of a professional mortgage
broker.
C
Cash Back Mortgage
A cash back mortgage is an option, used in fixed
rate mortgages, that offers the buyer a lump sum
of cash at the time of their closing. This method
is especially helpful in covering the expenses of
moving, lawyer’s fees, or even renovations to your
new home.
Closed Mortgage
A closed mortgage sets a limit on the amount
and frequency at which you may make lump sum
payments. In this case you may be charged a
penalty should you choose to pay off your mortgage
prior to the end of your term (for example, if you sell
the home). However, a closed mortgage offers fixed
payments and longer amortization periods, so that
homeowners don’t have to worry about unexpected
changes to their monthly expenditures.
Commercial Mortgage
A commercial mortgage is secured using real estate
as collateral.
Construction Mortgage
A construction mortgage is secured by real
estate. This type of mortgage is used to fund the
construction or renovation of buildings on the
property.
Conventional Mortgage
This common type of mortgage loan does not
exceed 80% of the property value (the lesser of the
purchase price or the appraised value). For this type
of mortgage, you must have a minimum of 20% for a
down payment.
Credit Score
Your credit score is a number that represents your
creditworthiness. There are two agencies offering
credit reports in Canada, Equifax and TransUnion,
and you may order a free copy of your credit report
as many times per year as you’d like, provided you
make the request in writing. Your credit score will
impact which mortgage products you qualify for
and what interest rate you can obtain.
Customized Mortgage
A customized mortgage is simply a mortgage loan
that doesn’t meet conventional criteria. Customized
mortgage loans include cash back, zero-down, tax
deductible and more.
D
Debt Consolidation Loan
A debt consolidation loan combines several types of
debt and allows you to make one monthly payment,
rather than many.
Down Payment
This is the amount of money that a homebuyer
must have available to secure a mortgage, generally
ranging from 5%-25% of the purchase price.
F
Fixed Rate
In a fixed rate mortgage, the interest rate is fixed for
a specific amount of time. This period of time (the
mortgage term) can range anywhere from 6 months
to 10 years. Over the course of the mortgage, less
of the payment counts toward interest, and more
toward the principal.
H
HELOC
A HELOC, or Home Equity Line of Credit, can be
your only loan against your home, or can function
as a second mortgage. A HELOC works similar to a
personal line of credit. In order to obtain a HELOC,
the homeowners much have at least 35% of equity
in their home.
High-Ratio Mortgage
A high-ratio mortgage is one that is more than
80% of the home’s value (the lesser of purchase
price of appraised value), up to 95%. This type of
mortgage must be insured against borrow default.
The insurance premium may be added to the loan or
paid in advance.
I
Interest
This is the cost of borrowing money for a period
of time. Interest is typically paid to the lender
in installments along with the repayment of the
principal loan amount.

Interest Rate
This is the rate at which you pay interest, calculated
as a percentage of the principal amount, charged by
the lender. In Canada, interest rates on mortgages
are compounded twice per year.
Investment Property Mortgage
An investment property mortgage is specialty
financing that helps facilitate real estate
investment. Typically, terms for investment property
mortgage are different than those for traditional
mortgage properties, so it’s wise to work with
a mortgage broker when obtaining this type of
mortgage.
L rates.
Leasing
Leasing is a way to obtain use of a property for
a specific period of time. Essentially, a lease is a
contract between an owner and a renter, sometimes
with the option to purchase the property at the end
of the lease period.
M homeowners who plan on selling their home soon or
Maturity Date
The maturity date is the end of the mortgage term.
At this time you may choose to repay the balance
of the principal or renegotiate the mortgage using
current interest rates.
Mortgage
A mortgage is a type of loan that uses the home you
buy a security. A mortgage loan is a legal document
against the title of your property.
Mortgage Broker
A mortgage broker is an intermediary between
a borrower and a lender. This person must be a
Licensed Mortgage Associate for at least two years
before becoming a Mortgage Broker.
Mortgage Insurance
Mortgage insurance is required by the lender on a
high-ratio mortgage. In the event that a borrower
defaults on their loan, mortgage insurance protects
the lender. There are three mortgage insurers in
Canada: AIG, Canadian Mortgage and Housing
Corporation (CMHC), and Genworth.
Mortgage Life Insurance
This type of insurance will pay a mortgage off in full
should the homeowner die or become disabled. You
may choose to add the insurance premium to your
monthly mortgage payments.
Mortgage Options
These are ways to tailor your mortgage to fit your
unique needs and circumstances. A few common
mortgage options include open and closed
mortgages, pre-payment options, fixed or variable
O
Open Mortgage
An open mortgage allows the homeowner the
option to pay off their entire mortgage or make large
lump sum payments without penalties or additional
fees. An open mortgage may be a good choice for
require a shorter mortgage term. Because an open
mortgage comes with a shorter term, it typically
also comes with a higher interest rate.
P
Payment Schedule
This is the frequency at which the homeowner
makes their mortgage payments. Payment options
include monthly, semi-monthly (twice a month),
bi-weekly (every other week), and weekly payments.
More frequent payments generally results in lower
interest costs over the life of your mortgage and
can shorten your mortgage term significantly.
Portability
Should a homeowner decide to move, a portable
mortgage allows the homeowner to carry over their
current mortgage conditions to their new home.
Pre-Approval
Mortgage pre-approval qualifies an individual for a
specific loan amount before he or she begins to look
for houses, based on how much money the lender
is willing to lend to the borrower. It also guarantees
their mortgage at the current interest rate for a
period of 120 days.
Pre-Payment
Pre-payment is when the homeowner pays off the
remainder of their mortgage before the term is up.
Pre-Payment Penalties
Certain mortgage products penalize the homeowner
for paying off their mortgage early. Typically, the
penalty is equal to three months of interest or the
interest rate differential.
Pre-Payment Privileges
Certain mortgage products allow the homeowner
to make mortgage payments on top of their regular
mortgage payments without a penalty. These
additional payments may include doubling up on a
monthly payment, increasing monthly payments,
and paying off part of their mortgage principal up to
a certain percentage.
Principal
The principal is the amount the of mortgage loan,
not including interest.
Private Mortgage
A private mortgage is offered by a privately-owned
corporation or an individual, as opposed to a
conventional lender.
R Term
Refinancing
Refinancing a mortgage is to pay off an existing
mortgage and arrange a new mortgage, often with a
different lender.
Reverse Mortgage
A reverse mortgage is designed for individuals 60
years and older. This type of mortgage gives the
homeowner a lump sum of cash. In exchange, the
homeowner gives a mortgage to the lender for up to
40% of their home equity.
S
Second Mortgage
A second mortgage is an additional mortgage on a
property that is already mortgaged.
Self-Employed Mortgage
A self-employed mortgage is specially designed for
entrepreneurs who cannot prove their income in the
traditional way.
Sources of Down Payment
Homebuyers may make their down payment from a
variety of sources, including but not limited to:
• Borrower’s savings
• RRSO withdrawal
• Gifted funds from family
• Proceeds from the sale of another property
• Funds borrowed against proven assets
• Sweat equity
• Cash back from lender
• Borrowed funds
T
Tax Deductible Mortgage
A tax-deductible mortgage uses your mortgage
payments to generate tax refunds. There are several
techniques to accomplish this type of mortgage
that are best used with the help of an experienced
mortgage broker.
A mortgage term is the length of time for which a
mortgage agreement exists between a borrower and
a lender. Mortgage terms generally range anywhere
from 6 months to 10 years. This is the period
of time an interest rate is fixed, after which the
borrower must either repay the remaining balance
or renegotiate with the lender.
V
Variable Rate
A variable rate mortgage is one in which payments are
fixed, but the interest rate will fluctuate with changes
in the Prime Rate. When rates go up, a larger portion of
the payment goes toward interest. When rates go down,
more of the payment goes toward principal.
GLOSSARY OF

HOME
EQUITY
TERMS
 GLOSSARY OF HOME EQUITY TERMS

Automated Valuation Model

A
Automated Valuation Model (AVM) is a tool
that uses mathematical modeling to estimate
Amortization
your home’s value, using inputs such as data on
Amortization is the process of paying off a loan
comparable home sales, listing trends, and home
according to a regular repayment schedule. With
price changes.
a home equity loan amortization schedule, the
percentage of your fixed monthly payment that
applies toward paying down the interest on your
C
loan decreases over time as the amount applied
Cash-out refinancing
against your principal increases.
Cash-out refinancing involves replacing your
original mortgage with a new mortgage for a
Annual Percentage Rate (APR)
greater amount in order to access the equity in your
Annual Percentage Rate (APR) is the cost,
home. At closing, your lender pays off the original
expressed as a yearly percentage, of what you pay
mortgage and you receive the difference in cash or
a lender for the opportunity to borrow the lender’s
the difference is used to pay off debts that you may
money. Because it takes into account your interest
specify.
rate, discount points and lender fees, it may be
higher than the interest rate of the loan.
Closed-end loan
Closed-end loan is one in which you receive your
Appraisal
money in one lump sum at closing and agree to
Appraisal is the report performed by a licensed,
repay it by a specified date.
certified appraiser that provides an estimate of the
current market value of your home on a specific
Closing
date.
Closing, also known as settlement, is a meeting
between you and a closing agent at the conclusion
of your loan application process when you sign your
loan documents.
Collateral
Collateral is property that you pledge to a lender to
secure a loan. Because you are giving a security
interest in your home to your lender, your home
serves as collateral for your home equity loan. If you
don’t make your loan payments, a lender may legally
foreclose on your home and sell it to recoup the
amount you owe.
Combined Loan-To-Value (CLTV)
Combined Loan-To-Value (CLTV) is the ratio,
expressed as a percentage, of the unpaid amount
of all mortgages and loans secured by your home
and the appraised value of your home. For example,
if your home is appraised at $300,000 and you owe
$100,000 on your mortgage and $50,000 on your
home equity loan, your CLTV is 50%.
Credit report
A credit report is the record of all your debts and
obligations and how responsible you are in handling
them. To help them decide if they will give you a
loan, lenders look at your credit report to see the
frequency with which you use credit, whether you
make your payments on time, and if you have too
much debt in relation to your income.
D Fixed term
Debt-to-income (DTI)
Debt-to-income ratio (DTI) is one of the factors used
to determine if you qualify for a loan. It compares
your total monthly income with all the payments
you’re expected to make each month, including your
home equity loan payment. For example, if your
gross household monthly income is $5,000 and you
have recurring monthly debt of $2,500, your DTI is
50%.
Default
Default occurs when a borrower fails to meet the
obligations of the loan contract, including failure to
make loan payments.
Delinquency
Delinquency occurs when a borrower falls behind
with making on-time payments, per your contract
with the lender.
Depreciation
Depreciation occurs when property decreases in
value over time.
E
Equity
Equity is the difference between the market value of
your home (what it could sell for) and the amount
you still owe on your mortgage. For example, if the
market value of your home is $300,000 and you owe
$100,000, you have $200,000 in home equity.
F
Fair Housing Act
The Fair Housing Act is a Federal law that prohibits
discrimination based on a borrower’s race, color,
religion, gender, handicap, familial status (families
with children) or national origin and applies to all
aspects of mortgage and home equity lending.
Fixed rate
A fixed rate is an interest rate that stays the same
for the life of a loan.
Fixed term refers to a loan with a pre-determined
payoff date.
Forbearance
Forbearance is the grace period when foreclosure is
postponed to allow a borrower time to catch up on
past-due payments.
Foreclosure
Foreclosure is the legal process that allows a lender
to seize and later sell property used as collateral for
a loan because the borrower defaults on the loan.
G
Grace period property used as collateral for a loan. Typically, your
Grace period is the period after a loan’s payment due mortgage is considered the first lien because, in
date during which you can make a payment without case of foreclosure or sales of the property, it’s the
incurring a late fee. first loan that must be repaid. A home equity loan
or line of credit is usually considered a second lien
Gross income because they’re the next in line for repayment after
Gross income is your total income before taxes and the mortgage. Liens are released when the loan is
other expenses are deducted. repaid in full.

H Loan Estimate
Loan Estimate is an estimate provided to you by
Home equity loan (HEL) a mortgage or home equity lender detailing all
A home equity loan (HEL) lets you borrow a fixed the anticipated costs associated with buying,
amount, secured by the equity in your home, and refinancing or taking out an equity loan on your
receive your money in one lump sum. Typically, home. After you apply for a mortgage or an equity
home equity loans have a fixed interest rate, fixed loan, your lender must mail a Loan Estimate to you
term and fixed monthly payment. Interest on a home within three business days of your application being
equity loan may be 100% tax deductible under certain accepted.
circumstances. Please consult your tax advisor to
see if you qualify. M
Home equity line of credit (HELOC) Monthly housing payment (PITI)
A home equity line of credit (HELOC) lets you borrow Monthly housing payment, also called PITI, is total
up to a fixed amount, secured by the equity in your you pay every month for a home loan. It includes
home, and withdraw your money as you need it Principal, Interest, real estate Taxes, homeowner’s
over a specified time period. Typically, home equity Insurance and, if applicable, private mortgage
lines of credit have a variable interest rate, variable insurance, flood insurance, and assessments.
term and variable monthly payment. Funds become
available for subsequent withdrawal as you pay P
down the principal balance on the line of credit.
Interest on a home equity line of credit may be 100% Power of attorney
tax deductible under certain circumstances. Please Power of attorney is a legal document authorizing
consult your tax advisor to see if you qualify. one person to act on behalf of another.

I Prepayment
Prepayment is the full or partial payment of a loan’s
Interest rate principal balance before the due date. It can result
Interest rate is the cost, expressed as a percentage, when you make extra payments, sell your property
of what you pay a lender for the opportunity to or refinance your existing mortgage.
borrow the lender’s money. It is one of the factors
that goes into determining the Annual Percentage Principal
Rate on your loan. Principal is the actual amount of money you borrow
on a loan; you also pay a lender interest, determined
L by your interest rate, for the opportunity to borrow
the lender’s money.
Liens
Liens are a lender’s claims against the value of R
Refinancing
Refinancing involves paying off your existing mortgage
with funds from a new mortgage secured by the same
property. Typically, homeowners refinance to get a
lower interest rate, reduce their monthly payments or
to access equity using a cash-out refinance.

T
Title
Title establishes legal proof of your ownership of
property and establishes your rights as the owner.

U
Underwriting
Underwriting involves verifying the information you
provide on a loan application and evaluating whether
you will receive the loan. Many factors go into this
evaluation, including your income, employment history,
credit report, debt-to-income ratio and the value of
your assets and debts.
GLOSSARY OF

FINANCIAL
ADVISOR
TERMS
 GLOSSARY OF FINANCIAL ADVISOR TERMS

A Canadian Securities Institute. The CIM qualifies an

individual for licensing in discretionary portfolio
Asset Allocation management in Canada.
Asset allocation is an investment strategy that aims
to balance risk and reward for an investor. This is Certified Financial Planner
accomplished by apportioning a portfolio’s assets Financial Planning Standards Council develops,
according to the individual’s goals, risk tolerance promotes and enforces professional standards in
and investment time horizon. financial planning. A Certified Financial Planner
(CFP) professional meets internationally recognized
B standards of knowledge, skills and ethics.

Business Risk CFA Charterholder

Events that only affect a specific company or
industry, such as the BP Gulf of Mexico oil spill.
The adverse impact on its revenue or operating
expenses may cause the value of the company
stock to drop.
C
Canadian Investment Manager
The Canadian Investment Manager designation
is earned through an education stream of the
This credential is widely regarded in the global
financial industry for its rigorous focus on current
investment knowledge, analytical skill, and ethical
standards. The CFA designation symbolizes the
knowledge, discipline and integrity you should
expect from a portfolio manager.
Chartered Professional Accountant
The Chartered Professional Accountant (CPA)
designation is given to accounting professionals
in Canada after rigorous study, examination
and hands-on experience. The role of a CPA is
viewed as a trusted professional, known for
technical competence, integrity, objectivity and a
commitment to the public interest.
Currency Risk
Currency risk arises from the change in the price of
one currency relative to another.
D pay for the company’s stock, i.e. market price.
Discretionary Portfolio Management
A discretionary portfolio manager independently
manages the funds of each client in accordance
with the needs of the client.
E securities within a portfolio.
Economic Cycle
The economic cycle is the period during which
a country’s economy moves from expansion to
contraction and back again. The economic cycle
is influenced by many forces including: inflation,
interest rates, fiscal and monetary policy, and
natural events.
Economic Risk
When the overall economy experiences a downturn
(or recession), the earnings capabilities of most
companies are, at least temporarily, adversely
impacted. A decline in anticipated future earnings
usually lowers stock prices.
F or exchange traded funds.
Financial Risk
Financial risk is the dollar or percentage decline in
value an investor can accept, given their need for
capital preservation, income and overall level of
wealth.
I
Inflation Risk
The chance that investment returns won’t keep
pace with inflation over time, and consequently
erode the investor’s purchasing power.
Interest Rate Risk
Marketable fixed income investments, like bonds,
are sensitive to changes in interest rates. Bond
prices adjust in the opposite direction to interest
rate movements.
Intrinsic Value
Intrinsic value is what a company is really worth, as
opposed to what investors are currently willing to
Investment Management
Investment management refers to portfolio
management and the trading of securities to
achieve a specific investment objective. It also
commonly refers to the buying and selling of
Investment Policy Statement
A portfolio manager develops a written agreement
(usually known as an Investment Policy Statement
or IPS that takes into account your specific needs.
Your IPS is the basis upon which your portfolio
manager selects an appropriate mix of investments
and makes discretionary adjustments to your
portfolio.
Investment Portfolio
A collection of securities, or types of investment
vehicles, designed to spread the risk of possible
losses due to below expectations performance of
any one investment. It usually includes securities,
such as bonds, income equities, stocks, and pooled
Investment Risk
The possibility an investor’s actual return on an
investment will be lower than expected due to the
unpredictable direction of markets.
L
Liquidity Risk
The possibility of losses arising from situations in
which there is not enough cash to meet investors’
immediate needs. Securities whose market prices
are inherently volatile (like stocks) compromise
liquidity.
Longevity Risk
Given the uncertainty of a life span, longevity risk is
the chance that an investor outlives their money.
M given appetite for risk.
Management Expense Ratio
The percentage of the fund’s total assets deducted
from its returns each year to cover administrative
expenses, like management fees, sales charges,
trading costs, commissions, and so on.
Management Fee
A management fee is a periodic payment that is
made for investment and portfolio management
services. The fee covers not only investment
advisory services, but administrative services as
well. Usually, the fee is calculated as a percentage
of the assets under management.
Market Cycle
The market cycle is the period of time during which
stock prices rise, then fall, and then recover again.
The market cycle generally runs ahead of the
concurrent economic cycle.
Market Risk
The chance that the value of a security will
decrease due to changes in environmental factors:
stock price levels, interest rates, foreign exchange
rates or commodity prices. Market risk affects
almost all types of investments, including stocks,
bonds and real estate.
Marketability Risk
An investor’s ability to readily convert an investment
to cash at prevailing market prices, which is a
function of trade volume and bid-ask spreads.
P S
Portfolio Management
The art and science of making decisions about
investment mix and policy, matching investments
to objectives, asset allocation for individuals, and
balancing risk against performance. Portfolio
management is all about strengths, weaknesses,
opportunities and threats in the choice of debt
versus equity, domestic versus international,
growth versus safety, and many other tradeoffs
encountered in the attempt to maximize return at a
Portfolio Manager
Portfolio managers are firms and people who
manage investment portfolios on behalf of private
clients. Portfolio managers differ from mass-
market or retail investment managers because they
manage larger amounts of money for fewer clients.
Private Client
Private clients are individuals and families who have
a significant financial portfolio and require expertise
and access to investments beyond those available
to the mass market.These individuals want to earn
reasonable returns for the risk they are prepared to
take.
R
Risk Perception
A subjective judgment held by a person about the
characteristics and severity of a risk, i.e. likelihood,
magnitude and timing of its effect.
Risk-reward Relationship
The concept implies that potential return rises with
an increase in risk. Accordingly, an investor must
accept the possibility of loss to achieve higher
return on invested money.
Risk Tolerance
The degree of uncertainty that an investor can
handle in regard to a negative change in the value of
an investment portfolio is personal risk tolerance.
Separately Managed Account
In a separately managed account, each client’s
investments are held completely separate from the
holdings of other investors. This way, private clients
get portfolios individually tailored to their situation and
preferences.

T
Trailing Commission
A trailing commission is money you pay an advisor
each year that you own a pooled investment product,
like mutual funds. The fee compensates the advisor for
􀀁nancial advisory services, like actively servicing your
account and making constructive suggestions. Not all
mutual funds pay trailing commissions.

V
Valuation Risk
The original purchase price paid for security is too
high.

W
Wealth Management
Wealth management is a term generally used to
describe a highly customized and sophisticated
portfolio management and investment planning service
directed to private clients. Wealth management goes
beyond managing investments to address a client’s
entire 􀀁nancial situation.
GLOSSARY OF

PRIVATE
EQUITY
TERMS
 GLOSSARY OF PRIVATE EQUITY TERMS

A the limited partner. It will also determine how profits

Alternative assets – This term describes non-
traditional asset classes. They include private
equity, venture capital, hedge funds and real
estate. Alternative assets are generally more risky
than traditional assets, but they should, in theory,
generate higher returns for investors.
Angel Investor - A high net worth individual active in
venture financing, typically participating at an early
stage of growth.
C new investors.
are divided among the limited partners and general
partner.
Closing – This term can be confusing. If a fund-
raising firm announces it has reached first or
second closing, it doesn’t mean that it is not
seeking further investment. When fund raising,
a firm will announce a first closing to release or
drawdown the money raised so far so that it can
start investing. A fund may have many closings, but
the usual number is around three. Only when a firm
announces a final closing is it no longer open to

Capital distribution – These are the returns that
an investor in a private equity fund receives. It is
the income and capital realized from investments
less expenses and liabilities. Once a limited partner
has had their cost of investment returned, further
distributions are actual profit. The partnership
agreement determines the timing of distributions to
The advantage for an institution is that it should
see a higher return than if it invested all its private
equity allocation in funds – it doesn’t have to pay a
management fee and won’t see at least 20 per cent
of its return swallowed by a fund’s carried interest.
But to co-invest successfully, institutions need to
have sufficient knowledge of the market to assess
whether a co-investment opportunity is a good one.
D The amount of capital that the fund manager
Due Diligence – Investing successfully in private
equity at a fund or company level, involves thorough
investigation. As a long-term investment, it is
essential to review and analyze all aspects of the
deal before signing. Capabilities of the management
team, performance record, deal flow, investment
strategy and legals, are examples of areas that are
fully examined during the due diligence process.
E invests in Company B in June 1996 and then sells
Exit – Private equity professionals have their eye on
the exit from the moment they first see a business
plan. An exit is the means by which a fund is able
to realize its investment in a company – by an
initial public offering, a trade sale, selling to another
private equity firm or a company buy-back. If a
fund manager can’t see an obvious exit route in a
potential investment, then it won’t touch it. Funds
have the power to force an investee company to
sell up so they can exit the investment and make
their profit, but venture capitalists claim this is
rare – the exit is usually agreed with the company’s
management team.
Early-stage finance – This is the realm of the
venture capital – as opposed to the private
equity – firm. A venture capitalist will normally
invest in a company when it is in an early stage of
development. This means that the company has
only recently been established, or is still in the
process of being established – it needs capital
to develop and to become profitable. Early-stage
finance is risky because it’s often unclear how the
market will respond to a new company’s concept.
However, if the venture is successful, the venture
capitalist’s return is correspondingly high.
G LPs typically include pension funds, insurance
General partner – This can refer to the top-ranking
partners at a private equity firm as well as the firm
managing the private equity fund.
General partner contribution/commitment -
contributes to its own fund. This is an important
way for limited partners to ensure that their
interests are aligned with those of the general
partner.
H
Holding period (also known as the “lock-up”
or “Term”) – This is the length of time that an
investment is held. For example, if Company A
its stake in June 1999, the holding period is three
years.
I
Initial public offering (IPO) – An IPO is the official
term for ‘going public’. It occurs when a privately
held company – owned, for example, by its founders
plus perhaps its private equity investors – lists a
proportion of its shares on a stock exchange. IPOs
are an exit route for private equity firms. Companies
that do an IPO are often relatively small and new
and are seeking equity capital to expand their
businesses.
L
Leveraged buy-out (LBO) – The acquisition of a
company using debt and equity finance. As the
word leverage implies, more debt than equity is
used to finance the purchase, e.g. 90 per cent debt
to ten per cent equity. Normally, the assets of the
company being acquired are put up as collateral to
secure the debt.
Limited partners – Institutions or individuals
that contribute capital to a private equity fund.
companies, asset management firms and fund of
fund investors.
Limited partnership – The standard vehicle for
investment in private equity funds. A limited T
partnership has a fixed life, usually of ten years. The
partnership’s general partner makes investments, Term sheet – A summary sheet detailing the terms
monitors them and finally exits them for a return and conditions of an investment opportunity.
on behalf of the investors – limited partners. The
GP usually invests the partnership’s funds within Turnaround – Turnaround finance is provided to
three to five years and, for the fund’s remaining life, a company that is experiencing severe financial
the GP attempts to achieve the highest possible difficulties. The aim is to provide enough capital to
return for each of the investments by exiting. bring a company back from the brink of collapse.
Occasionally, the limited partnership will have Turnaround investments can offer spectacular
investments that run beyond the fund’s life. In this returns to investors but there are drawbacks: the
case, partnerships can be extended to ensure that uncertainty involved means that they are high risk
all investments are realized. When all investments and take time to implement.
are fully divested, a limited partnership can be
terminated or ‘wound up’. V
Venture capital - The term given to early-stage
M investments. There is often confusion surrounding
this term. Many people use the term venture capital
Management fee – This is the annual fee paid to very loosely and what they actually mean is private
the general partner. It is typically a percentage equity.
of limited partner commitments to the fund and
is meant to cover the basic costs of running and
administering a fund (or, the LP). Management
fees tend to run in the 1.5 per cent to 2.5 per cent
range and often scale down in the later years of a
partnership to reflect the GP’s reduced workload.
The management fee is not intended to incentivize
the investment team – carried interest rewards
managers for performance.

S
Seed capital – the provision of very early stage
finance to a company with a business venture or
idea that has not yet been established. Capital is
often provided before venture capitalists become
involved. However, a small number of venture
capitalists do provide seed capital.

Syndication – The sharing of deals between two or

more investors, normally with one firm serving as
the lead investor. Investing together allows venture
capitalists to pool resources and share the risk of
an investment.
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