Investing 101

Types of investments

When it comes to investing your money, there are many great options to choose from. Here are the different types of investments:

Non-registered investments

• High-Interest Savings Accounts: A High-Interest Savings Account (HISA) is a wonderful savings tool for short-to-long term savings goals. Your money grows safely, with many of the best high-interest savings accounts in Canada currently offering 0.50-2.75% interest. Learn more about HISAs.
• Guaranteed Investment Certificate: GICs usually earn higher interest returns than your regular savings account. The only downside is you are agreeing not to use the money in your GIC until the GIC term ends. For specific GIC’s which are cashable or redeemable, you can access your funds if you need to, but you may lose your interest or get a smaller return. Learn more about GICs.
• Stocks: Stocks or shares of a particular company, are listed in the stock market for you to purchase. Each stock owned by you represents your ownership in the company. Investing in stocks comes with medium to high risk, but the gains can be much higher than any other investment option. The price of each stock can fluctuate as the company’s market value changes.
• Bonds: Companies issue bonds in order to raise cash. In exchange, the company will pay you interest and finally the principal amount after the period. It is just like a loan agreement. Some bonds are issued for six months. Some are even issued for greater than ten years. Most importantly, the greater the length of the bond, the higher the interest rate on it. Bonds are generally a safer option than purchasing shares of companies on the stock market, but their returns are also significantly lower than the stock market.
• Exchange-Traded Funds (ETFs): An exchange-traded fund is an investment fund, which allows you to buy a large pool of individual stocks or bonds in one purchase. An ETF tracks stock indexes like the S&P 500, different commodities, bonds or a bunch of assets grouped together. An ETF distributes ownership of the whole pool of assets into a single share, ready to be traded like a common stock. If you’re looking to invest for higher returns and have less financial knowledge, an ETF is great for you. Another benefit to buying ETFs is that they are generally managed electronically and hence have a very low ongoing management cost, especially vs. similar managed instruments like Mutual funds.
• Mutual Funds: A mutual fund is a pool of various stocks and bonds, together in a single investment portfolio. Investing in a mutual fund is quite different from shares or bonds as the pool represents a collection of assets. You can earn money when the stocks within the pool generates dividends, and on any interest payments from the bonds. If you have a lot of money, but no interest or knowledge of the financial world, mutual funds are good for you, as fund managers handle them for you. However, this management comes at a cost, which can erode your gains over time. Always make sure you consider and identify management costs when purchasing any Mutual Fund

Registered investment accounts

Take advantage of tax-sheltered investment vehicles. Here are some of the best options:

• Registered Education Savings Plan (RESP): A Registered Education Savings Plan (RESP) helps you invest in your child’s education. The Canadian government allocates a certain percentage to match the contributions under the plan for children under the age of 18. Most importantly, if your child doesn’t go to a post-secondary institution or use the funds, you have other options. If you meet certain conditions and have enough RRSP contribution room, you can withdraw your contributions tax-free or transfer up to $50,000 in accumulated earnings to an RRSP.
• Tax-Free Savings Account (TFSA): A TFSA is a tax-free savings account that can hold different investments such as GICs, stocks, bonds and even cash deposits. All of these investments are sheltered from taxes when they are a part of your TFSA, allowing you to grow your savings faster. A TFSA is a super flexible savings vehicle. While it is best suited for longer-term investments, a TFSA can help you save for short, medium- or long-term goals such as, buying a new car, home renovations or a fancy trip. This is because, unlike a RRSP, there is no penalty to withdraw your money. Learn more about TFSAs.
• Registered Retirement Savings Plan: A Registered Retirement Savings Plan (RRSP) is an investment account registered with the Canadian federal government that helps you save up for your retirement. You can utilize your RRSP to hold a variety of investments such as GICs, mutual funds, bonds, equities and savings deposits. If you filed an income tax return or have earned income this year, you can contribute to an RRSP. Please note that there are limits on how much you can contribute to an RRSP each year. You can withdraw money from your RRSP as long as your funds are not locked in a specific contract like a GIC. Your withdrawals will be subject to tax deductions and will be counted as income. Learn more about RRSPs.