For those of us who are new to all this investing stuff, knowing what types of investments are out there, what they are, and what the pros and cons are of each can be extremely helpful. But so many sites were over my head when I first started learning. So, based on my own information, I’ll discuss these, to the best of my knowledge. If any readers have additions or corrections to my notes here, please send them to me. So, I’ll begin my discussion with the simplest investments and work my way up.
High-Yield Savings Accounts, Money Market Accounts
These days the brick and mortar banks and credit unions are scrambling to compete with online banks in the arena of free chequing accounts, and High-Interest savings accounts. There’s no longer any excuse to have your extra money earning less than 3 or 4 %. Many of these accounts are free to open, and have no fees. Sometimes they do put a 24 hour delay on withdrawing money, or on the number of withdrawals per month. These accounts are as easy to open as a traditional bank account and sometimes come with a bonus for opening the account (free ipod anyone?).
These accounts have the huge pro of being easy to set up, flexible in terms of getting your money out, and your principle is guaranteed (you won’t lose money). I suggest that everyone should park their spare cash in one of these. Shop around. I currently have 3 such accounts to take advantage of more than one bank. They are a great way to get used to how good it feels to earn money on your money. Unfortunately there’s a big con. Compared to other investment types, the interest rate on these is very low. They are not a good long term investment option.
GICs and CDs
Guaranteed Investment Certificates and Certificates of Deposit are very similar (not sure if they are actually the same thing). You deposit money with your bank for a fixed period of time like 1 year or 5 years, and in return your bank offers you a ‘premium’ interest rate for that period of time. Since they have your money locked in (a big con), they usually offer you several interest points above a savings account. These are very easy to set up with your bank so they are good for new or inexperienced investors.
Unfortunately, the interest rate on these is not what it used to be. I shopped around on a few Canadian bank websites and the GICs offered don’t seem to squeak much past 5% as of this article’s writing. Silly, I just don’t see that as worth it for tying up my money for 5 years! Unfortunately some people who are intimidated by other riskier investment options or who have been burned by the stock market in the past, tend to place all their retirement money into this type of investment. Not a good long term idea. But good say for a teenager saving for a car or college, or as a small part of an investment portfolio.
I put real estate in the middle of my list because I don’t know very much about it yet. I have read that buying your own home is one of the biggest and best investments that many people make. Most investment gurus seem to agree that home ownership is a great idea. Real estate markets fluctuate but rise over the long term. And owning your own home is something we want to do anyway, so getting a good standard fixed mortgage and paying at least 20% down when you buy it, can be a great move.
Then there are the people who watch a video or talk to friends and decide they can get rich “flipping houses”. No! This is not an amateur’s game, and many get rich videos that tell you to buy real estate on credit are setting you up for trouble. Only lots of learning, some initial cash to start with, and some more learning and experience will let you win at real estate. Those who succeed at this do so with tons of hard work. It’s not a get-rich quick plan. Many people are finding that investment or vacation properties they bought are adjusting into mortgages they can’t afford. And with the slowing real estate market, they can’t sell them either. Don’t get trapped with more property than you can handle. Learn more about it from other sources because I’m not an expert either.
Bonds, Bond Funds
Bonds are like certificates of debt (like an I.O.U.), where you loan the issuer money, and they agree to pay it back plus a certain amount of interest. They are issued by corporations as well as various levels of government. The issuer is a big factor in how much you can earn on the bonds and how risky they are. For example, the Government of Canada offers savings bonds that are guaranteed but provide a pathetic interest rate.
Many investors tend to have some percent of bonds in their portfolios in order to have a less risky portion. Bonds tend to perform worse than stocks but be more stable. They are good as part of a mutual fund offering too. Or if you have a bunch of mutual funds, you can include a bond fund or a mutual fund with a good chunk of bonds to provide diversification. But as far as those silly Gov of Canada savings bonds, last I checked they earn much less interest than a simple High Yield Savings account. Beware that if the issuer of the bond goes belly-up, you might not get your money back.
Funds: Mutual Funds, Index Funds, Stock Funds, Bond Funds, etc
A fund is a way to invest in a bunch of things and have your investments professionally managed without having to worry too much about it yourself. A fund is typically a way for all the buyers of the fund to pool their money, give it to the fund manager and the manager uses all that money to buy a variety of investments like bonds, stocks, etc to create a little portfolio that has a certain goal, philosophy and risk level. You then buy shares in the fund like you would in a stock. Then it’s the fund management team’s job to balance the investments and keep an eye on how they are performing. There are many different types of funds. Index Funds follow a market index or trend. Stock funds consist mainly of stocks, bond funds mainly of bonds, etc. Funds are an excellent way to invest in stocks and other investment types without having to do all the research for each individual one yourself. Many RRSPs or 401Ks are invested in funds like this.
As a downside, funds are risky to the extent that they fluctuate with the market as the different investments they are made of fluctuate. A stock fund that’s full of technology stocks for example will drop in value if the technology sector falls. So it’s a good idea to hold more than one fund that has a long track record of good performance, and to diversify what types and industries are covered by your funds. You can choose a range from conservative to aggressive funds. You also have to keep an eye on fund fees and how the fees are applied (load type), because some funds have fees that take a real bite out of your earnings. Funds can be purchased from an online or physical fund broker. Start by talking to your bank, but be careful that you are given the choice of all the funds available and not just a subset offered by that bank or broker.
Some good sites to do fund research are:
When you say stocks, people immediately think of the stock market crash, and how many people lost everything. The world is a different place now. We have policies and procedures in place to help prevent that kind of crash, and people now know the value of not putting all their eggs in one basket. Still, stocks can be risky, and require lots of research, planning, and a high risk tolerance. Stocks or shares are like pieces of ownership of a company. If you own a stock in a company you are a part owner. The more stocks you own in that company, the more say you can have in how the company operates. If you have more shares than anyone else, you are the majority share holder. Some stocks earn dividends which are when the company gives part of it’s earnings to shareholders (you get a payment for each dividend earning share you own). This is another way to make money by owning shares.
The volatility of stocks and how risky they are depends on the company the share is for and on the economy in general. A lot of things can affect the performance of a company’s stocks, or can affect the performance of the overall stock market. If people feel confident, they buy more and the price goes up. And vice-versa when prices go down. Knowing which stocks are a good investment involves a lot of research about the company, industry and economy. Buying stocks based on casual tips (or spam email!) is not a good idea. You can buy stocks through a stock broker or online brokerage service. There are usually fees associated with the buying and selling activities.
Note that the word Securities refers to stocks, bonds, shares and other traded investments.
I’m sure there are more investment types that I haven’t learned about yet, and that there is more to know about the things I have just discussed. But the important thing for you to get out of this article is that it’s a good idea to have a mix of investment types based on your risk tolerance and knowledge level… and that you need to learn as much as you can about an investment before you buy. Then you must keep an ongoing eye on your investments to keep them optimized. Relying 100% on someone else to do this for you, is not very wise. Once you learn the basics, you can be in control of your own future!