What are they and how do they work?
Investments are monetary assets or goods purchased with the goal of generating income or appreciation. Some of the more common investment options are explained below:
Guaranteed Investment Certificates
GICs are investments that pay a specific amount after a period of time. They are among the safest investments, but the return may not be high. The return depends on prevailing interest rates and how long you invest for. The period can be as short as three months or as long as many years. The Canada Deposit Insurance Corp. guarantees GICs up to $100,000.
A mutual fund is a pool of investments owned by many people and managed by professional portfolio managers. Investors buy shares or units of the fund and can redeem them at any point. Fund managers use the money to invest in a variety of assets, described in the mutual fund prospectus. The return on mutual funds is not guaranteed.
Exchange-Traded Funds (ETFs)
An exchange-traded fund (ETF) is a managed collection, or “basket,” of stocks and bonds. There are different kinds of ETFs targeting different risk tolerance profiles, sectors, geographical areas, and trends. For example, you can purchase an ETF with broad exposure to artificial intelligence or luxury consumer goods. Others represent the Canadian stock market or some other market or combination or markets. Unlike mutual funds, which are purchased and redeemed through the provider, ETFs are bought and sold on the open market. You can buy an ETF on the Toronto Stock Exchange, but you cannot buy a mutual fund there. As a result, you have a more control over the price at which you buy and sell, by using various order types common to market trading (automatically buying or selling when the price reaches a certain level). ETFs typically have significantly lower management fees than mutual funds.
Like a mutual fund, a segregated fund pools investors’ money for professional management. But these funds are actually insurance contracts. They have two components: an investment that produces the return and an insurance contract that covers the risk. Unlike mutual funds, these funds guarantee a part of your principal. A small part of the fund’s assets goes to insure there will be enough cash to pay that guarantee. Segregated funds have other features, including creditor protection. Like all insurance contracts, they allow you to name a beneficiary. After your death the fund pays your beneficiary without tax.
Canada Savings Bonds
Savings Bonds were issued by the Canadian and various provincial governments. They could only be purchased by residents of Canada or of the province of issue. Savings Bonds typically pay a specified interest rate annually and are cashable at any time within a few months after they are issued. The amount you receive when you sell a Savings Bond will always be its face value or principal, plus the interest the bond has earned so far.
Stocks or shares, also called equities, are pieces of a company. A company’s stockholders or shareholders all have equity in the company and expect to profit when the company profits. There are two ways to profit from shares. The price of shares can rise on the market. Or the company can return some of its profits to shareholders in a dividend. Some companies have a long-established reputation for profits and dividends. Their shares are “blue-chip” stocks. Shares can be common or preferred
Corporate bonds are also called commercial paper. They are loans by the investor to a corporation. They have a fixed amount borrowed at a fixed interest rate and a set repayment date. Provinces and municipalities also issue bonds. The value of the bond at maturity is the principal plus interest. Bonds can trade on the market, with the value fluctuating according to market conditions. The quality of both government and private bonds is usually assessed by a rating agency.
Treasury bills, or T-bills, are short-term debt sold by the federal government, usually with maturity dates of three months to one year. They are sold at a discount and their face value is the return to the investor. These are ideal for investors seeking a short-term investment of 1 to 12 months.
Mortgage-backed securities are shares in a pool of mortgages, usually residential mortgages. Canada Mortgage and Housing Corp. (CMHC) guarantees the most popular type of mortgage-backed securities in Canada, but there are other mortgage-backed securities that do not enjoy this guarantee. These investments come with periods ranging from 6 months to 25 years. They pay monthly interest.
Futures are contracts to buy or sell a commodity, currency, or security sometime in the future. They allow you to lock in today’s price to buy a security at a future time, if you think the price will rise. Futures investing is not recommended for novice investors. Your portfolio manager might use it.
An option is the right to buy or sell a stock or other security for a specified price on or before a specific date. Options can protect a portfolio against a sudden fall or rise of a stock. They are not recommended for novice investors.
An annuity is a contract between you and a life insurance company. You invest money and the company provides you with steady income for a fixed term or the rest of your life. The income amount will depend on how much you invest, interest rates at the time you buy the annuity, and other factors like your sex and age. There are many different kinds of annuity