An investment is something you put money into to make Your Money grow. If you work a part-time job, that hard-earned cash can be invested, putting Your Money to work for you.
Investments carry various degrees of risk that may depend on the amount invested, its duration and, most importantly, the rate of return.
Safer investments provide a greater assurance that you can keep what was originally invested, though the rate of return may be lower. Higher risk investments may offer a higher rate of return; however, the risk that you may lose money on the investment increases.
Based on a budget and your goals, you'll need to decide what type of investor you are and the financial risk you're willing to take with Your Money.
Cash and cash equivalents
These are the safest investments, generally giving back the lowest rates of return. They consist of savings accounts, treasury bills and money market mutual funds that are easily convertible into cash.
- An account held with a financial institution
- Safe vehicle for short-term savings of any amount
- High liquidity (easy to cash)
- Deposits protected by Canada Deposit Insurance Corporation (CDIC members only)
- Short-term investment: terms of one month to one year
- Safe, government-backed
- T-Bills have a face value — you purchase them at a “discount” (less than the face value) and then redeem at face value; the difference is your return (e.g., you may pay $90 for a $100 face value T-Bill and receive the face value upon maturity)
- Requires an investment of $1,000 and up; can be purchased from most financial institutions
These investments are a source of relatively steady investment income over time. GICs, bonds and income mutual funds are fixed income investments that can earn more than cash and cash equivalents. But some of these come with an increased risk, so do your homework when considering these investments.
Canada Savings Bond (CSB)
- A special type of bond issued by the federal government and purchased through financial institutions
- Available only at specific times of the year
- You pay a fixed interest rate, subject to periodic adjustment by the government
- Safe, guaranteed by the government and highly liquid (although the Canada Premium Bond is cashable only once a year on its anniversary date)
- Unlike other bonds, CSBs cannot be traded
- Available in various amounts and for as little as $100
- Provinces may also offer savings bonds
Term Deposit/Guaranteed Investment Certificate (GIC)
- You invest a sum of money with a financial institution for a set period
- Traditional GICs pay interest and your principal and return are guaranteed
- Newer “market-linked” GICs guarantee principal, but any returns you may earn are linked to a stock market index
- Terms range from less than 1 month to 10 years
- Available in various amounts
Stocks and equity funds are investments with the greatest potential for high long-term returns. They are risky, offering the most bang for your buck, but with a bang that can go either way. You may stand to lose a portion of your initial investment if the stock falls.
In addition to returns provided by the increasing value of stocks, some equity investments also pay dividends. The company you've invested in pays shareholders some of the earnings according to the number of stocks they hold.Stocks — general
- Issued by corporations; investor becomes a partial owner in the corporation by buying shares (also called stocks) of the company
- Share prices and returns fluctuate, and there is no guarantee as to income
- Traded on stock exchanges or over-the-counter markets
- Common shares are usually purchased for potential capital appreciation (earnings)
- If the company makes money you will share in the profits either by seeing the value of your shares rise, by being paid dividends, or both; if the company suffers a poor year or the markets decline, your share values may fall and dividends are unlikely (resulting in a potential capital loss)
- Typically stocks of large, stable and actively traded companies with a record of regular dividend payments
- Tend to be conservative equity investments
- Low-cost common shares (typically under $1), usually purchased for speculative purposes
- Issued by start-up or unproven corporations seeking capital for expansion
- Corporations of all sizes issue common shares to raise money; generally, the smaller the corporation, the higher the risk
- Differ from common shares in several ways and are in fact regarded as bond-like investments
- Normally purchased by investors who want a steady stream of dividends, rather than capital appreciation
- You pay a dividend, which is higher yielding than a common share
- Value and share price influenced more by interest rate trends than by company's earnings
- They are preferred because you get a preferential claim to the assets/profits ahead of common shareholders
A mutual fund is an investment product in which your money is pooled with the money of many other investors. A professional fund manager invests this pool of money in a variety of securities, depending on the fund's specific objectives. If you're like many people, you don't have time to fully research and manage your investments, but you'd still like some say in where your money goes, and you'd like to be able to move it around from time to time. If this sounds like your style, you may want to consider mutual funds. There are funds that invest in specific markets or geographical sectors, while others invest in blue chip companies or small company stocks. There are also “green” funds that invest only in environmentally friendly companies.
Mutual funds have many advantages:
- You gain access to a wider range of investments than you may otherwise be able to afford
- You can have “instant diversification”: If one company or investment in your mutual fund flounders, it will likely have little effect on the mutual fund's overall performance
- They are readily available; most financial institutions offer a wide assortment of mutual funds
- They are a simple way of investing; for instance, most financial institutions give you the option of buying mutual funds through regular account withdrawals
- They offer the benefits of professional management
As with any type of investment, there is an element of risk with mutual funds. Although the fund is diversified, it will still reflect the performance of the securities in that fund. And depending on the mutual fund, it can vary from very low to very high risk. Mutual funds are generally intended to be held as long-term investments. With mutual funds, you can potentially earn money in two ways: through distributions (profits of the funds that are passed on to you) or through a rise in the unit or share price. Be aware of the fees involved with mutual funds. In many cases, there are no acquisition or disposal fees (these are called no-load funds). However, some funds may charge either an initial fee, called a front-end load, or a fee when you sell the mutual fund, called a back-end load. With these fees, you pay a percentage of the purchase price that may or may not be waived if you hold the fund long enough. All mutual funds have a fee known as the Management Expense Ratio (MER), which is the annual cost of managing and operating the fund.Precious metals
- Gold, silver and other precious metals, held in form of bullion (the actual metal) or certificates of ownership
- Bulk goods such as grains, metals, oil and foods
- Traded on commodities exchanges, held in the form of a contract
- Trust that holds income producing assets, e.g., real estate investment trusts; natural resource trusts
- Has an operating risk based on the underlying business
- A security whose value depends on the market value of something else, such as a stock or commodity
- Complex investments used by sophisticated investors for speculative purposes or to help manage risk (as a hedge against changing market conditions)
- “Options” and “futures” are examples; an option gives the investor the right to buy or sell a specific security at a given price before a specified date; a futures contract obligates the investor to buy or sell a specified amount of an asset at a set price on a certain date
Some people put their money to work in other areas. Perhaps the most common is real estate for rental purposes. In this form of investing owners may be able to earn rental income and see their capital investment appreciate over time, assuming real estate prices rise.
Where to Invest
Most banks, trust companies, credit unions and investment firms offer a range of investment options for investing Your Money. It all depends on what kind of investing you prefer according to risk, duration, amount and other market factors.
These financial institutions have consultants on hand to help you invest, either as part of the banking services included with your account or where you'll pay a fee for consulting services. Think about your goals, preferences and comfort zone before investing Your Money.
Resources for Investing Your Money
|Your Investment Profile worksheet (CBA)|
|Protecting Your Deposits (CDIC)|
Online Investment Calculators
|Mutual Fund Fee Impact Calculator (Investor Education Fund)|
|Investment Calculator (Bank of Canada)|
|Deposit Insurance Calculator (CDIC)|
Canada and Provincial Savings Bonds
|Canada Savings Bonds|
|Manitoba Builder Bonds|
|Ontario Savings Bonds|
|Québec Savings Bonds|
|Saskatchewan Savings Bonds|