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Investing 101

Learn about the best investment options and find the best investment type for your financial needs.

Investing your money in Canada

Investing means protecting and increasing your money’s purchasing power. When you begin investing your money, you strive to earn a rate of return that is equal to, or greater than the current rate of inflation. Finding the best investment accounts in Canada is easier when you know your investment goals, time horizon and risk tolerance. Learn about investing in Canada and find the best investment type for you.

Defining your investment goals

When it comes to handling money, everybody has a set of unique financial goals. How you choose to invest your money depends on your financial needs and risk tolerance.

If you need your money within the next few months, it is best not to invest in a long-term investment type like a 5-year GIC or a long-term bond. Short-term investment options include High-Interest Savings Accounts, short term GICs and stocks. If you are looking to take some risk with your money, you can look at the stock market. Investing is a very personal choice, so take your time to research the best options for your financial needs.

Your investment decision should rely on the following 3 factors:

  1. Investment amount
  2. Time
  3. Risk tolerance
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What’s your risk tolerance?

Investing doesn’t always have to be without any risk, or solely with risk. You can choose the level of risk you wish to take with your money. Risk tolerance simply means how much of your investment you can afford to lose.

Investments such as, GICs come with very low risk. If you are looking for a low risk investment, a GIC, or a High-Interest Savings Account can work for you.

If you can afford to take a bit more risk, in return for greater returns, try investing in company stocks or ETFs.

Each savings and investment product has its own set of risks and returns. Different risks can include: how readily you can access your money, how volatile the investment is, interest rate risk, currency exchange risk, inflation risk, economic risk.

Types of investment risks

  • Market risks: Market risk means your investments will react to market conditions, which can have a positive or negative impact on your investments. Market risks are also known as to as systematic risks. They can be difficult to predict or control. Market risk factors include interest rates, inflation, exchange rates, regulations and political changes.
  • Interest rate risk: Interest rate risk comes with investments like bonds and GICs. If a bondholder decides to sell their bond before maturity and interest rates have fallen, they risk having to sell their bond at a lower value. In the case of fixed-rate GICs, if the interest rate rises, your return does not change, and you are technically “losing” money for the remainder of the GIC term. In addition, if you break your GIC, you may risk losing your overall interest, leaving you with no returns at all.
  • Inflation Risk: Increasing inflation rates can affect the overall purchasing power of your returns over time. Inflation risk always affects fixed-income investments the most. When the inflation rates increase, any income from fixed-income assets (such as bonds, GICs, and other cash equivalents) lose some value and may even become negative returns. Some investments account for changes in the inflation rate, allowing the rate of return to rise with inflation. Investments like gold and property can do well during inflationary periods.

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.
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