Types Of Investments

When reading through the different type of investments, it is recommended to begin at the top and make your way down the list. Skipping some definitions may make it difficult to understand others.

As the name states, this investment is guaranteed. However, with no risk, comes no return (basically). Most GIC rates are equivalent to inflation (1-3%), so the value of your money remains constant. The GIC rates are influenced by three factors:
  1. Amount invested: the more money you invest, the higher the rate of return.
  2. Time invested: the longer you agree to let the bank hold onto your money, the more your money will earn.
  3. LType of GIC: “non-cashable” GICs are locked in, which means you agree to not withdraw the amount until an agreed upon date. If you decide to cash in your GIC before then (even if it is the day before the deadline), you will lose all interest accumulated in that period. These GICs have higher rates than “cashable” GICs.

Pros:
  • Available to anyone with a bank account (even if you are less than 18 years old)
  • No risk

Cons:
  • Basically no return
Similar to GICs, these certificates offer an agreed upon rate of return with a specified date. Plus, unlike most GICs, the majority of bonds make coupon payments (same concept as dividends). Also, bonds offer a higher rate of return than GICs, but there is one minor risk involved… Unless it’s a government bond, there is always the possibility that the issuer of the bonds goes bankrupt and cannot pay back the investor.

Pros:
  • Low risk

Cons:
  • Low return
Also referred to as the “Equity Class”, stocks offer the highest returns on your investments. But as Ben Parker told Spider-Man, “with great returns comes great responsibility”. You are responsible for doing your homework to improve your chances of making money, because unlike bonds and GICs, nothing is guaranteed in the stock market. This said, we have made it our goal to help you along the way. With our guidance and a little practice, we promise you will feel more comfortable than when you first started.

There are thousands of options available in the stock market. Generally, there are three major types of stocks:
  1. Blue Chips: Also known as “Bond Equivalents”, these large companies will not be growing much in the future, which implies their share price will remain pretty constant. However, they pay large dividends to their shareholders. Examples include Johnson & Johnson [JNJ], Procter and Gamble [PG], 3M [MMM], and most banks.
  2. Growth Stocks: These companies are believed to be in the early innings of their life cycle. While they already have an established brand name, they may not necessarily meet investors’ high hopes, which adds some risk to the investment. Examples include Dollarama [DOL.TO], Sleep Country [ZZZ.TO], Royal Caribbean [RCL] and just about every technology stock.
  3. Speculative Stocks: These companies are the riskiest of them all as they have just started doing business. Without much reporting on behalf of the company, it feels like a shot in the dark unless you have some insider information. However, if you do happen to pick a winning stock, you strike a gold mine like no other. Examples include marijuana, mining and pharmaceutical companies, such as Aurora Cannabis [ACB.TO], Nemaska Lithium [NMX.TO] and CRH Medical [CRH.TO].

Pros:
  1. Blue Chips offer low risk with higher returns than bonds
  2. Growth Stocks offer some of the highest rewards without taking on too much risk
  3. Spec Stocks offer the highest rewards of all

Cons:
  1. Blue Chips still do not offer very high returns, and can still lose you money
  2. Growth Stocks often spend periods in the red if they do not grow as fast as anticipated
  3. Spec Stocks can take forever to skyrocket, and they may never jump up at all
A mutual fund is a mixture of equity (stocks) and fixed income (bonds). Investors pool their money together and a manager will use it to trade stocks and bonds. A percentage of your investment is used to pay the manager’s salary. This percentage usually ranges from 1.5% to 2.5%, regardless of the fund’s performance. This percentage is referred to as a MER (Management Expense Ratio).

There are multiple funds to choose from, each one made to attract different investors. Some offer a balanced portfolio (50% bonds and 50% stocks) while others may take a more aggressive approach (70% stocks and 30% bonds).

Pros:
  • No responsibility (no homework)

Cons:
  • Management fee regardless of fund performance during the year
Also known as equity funds, these funds follow the market indices (Dow Jones, Nasdaq, S&P500). Basically, they are mutual funds with lower MERs. The reason you pay less is due to minimal fund activity. Instead of buying and selling all day long like most mutual funds, index funds just hold the averages. Commission fees are close to none and less activity implies one manager can take on multiple index funds, thus reducing the management fee per fund.

So what’s the catch? There is none… but that is up for debate. Some argue that, since index funds are less active, they are at the mercy of the market indices whereas actively traded funds can sidestep market declines if they are nimble enough. The issue with that logic is that, in reality, money managers are not perfect. Oftentimes, holding is a lot more profitable than trading in and out of the market.

Pros:
  • Lower MER
  • No responsibility (no homework)

Cons:
  • Some argue that your money is not safe when nobody is actively managing it
  • Note that these people are often managers who will profit more if you invest with them instead
Similar to an index fund, an ETF represents an average. Some will follow the technology sector, others will represent the average lithium stock. You can also buy an ETF that follows the entire market, just like an index fund. They also have very low MERs, as everything is basically computerized, thus eliminating the management fee.

So is there a difference between an ETF and an index fund? Yes. An ETF is a type of stock, which means its price changes constantly throughout the day and you cannot buy partial shares. An index fund is a type of mutual fund, which means it will update its share price only at the end of the day (meaning your transaction can take a day or two to be processed) and you can buy partial shares. In addition, ETFs offer a wide variety of averages to choose from, whereas index funds offer the market average as a whole.

Pros:
  • Low MER
  • Ability to choose a specific sector

Cons:
  • Cannot buy partial shares (minor issue if you decide to reinvest your dividends)