Investing can be very intimidating to some people. Without a feeling of knowledge, understanding, security and certainty, people may feel hesitant in investing. Can you blame them? Everyone works hard for their money and limits their spending in order to save and invest so why put your money into something that may not be guaranteed?
There are many different products to invest in, which all come with different risks. Your portfolio should always be tailored to satisfy you and your risk tolerance. To understand your risk tolerance, you should discuss this with an advisor. Before money is invested, your financial advisor should ask you a few questions to grasp your tolerance of risk and volatility in your portfolio. For example: How would a decline in value make you feel? What is your principle objective or time horizon? For more information on your risk options look at article: “Let’s Invest”. There are many options for investments that can give you different levels of risk. To name a few: stocks, bonds, mutual funds, ETF’s, and GIC’s.
GIC (Guaranteed Investment Certificate) is an investment with minimal risk. GIC’s can have a 30 day to 10 year maturity date. Your money is guaranteed at a fixed rate on its maturity date. You might be sitting there thinking “where do I go to get this deal?”, but there are some drawbacks. The money you invest is locked in, meaning you cannot withdrawal your money until it hits its maturity date. Also, the rate of interest you will receive may be very low. An average interest rate for a one year GIC is 1.5%. The longer you hold a GIC the “higher” the rate of percentage will be (though not by much). With that in mind, the average interest will not increase that much higher for a 10 year GIC. GIC’s are for investors who have a very low risk tolerance. As you can see, the amount of risk you take will have an effect on the amount of profit you get.
When holding a bond, an organization/or company is indebted to you. A bond holder lends money to a company or government at a fixed interest rate that has to be paid back to them. Bonds have ratings based on their past payments (credit rating). If a bond has struggled to make a payment over the years, it will have a lower ranking but most likely a higher coupon rate (rate at which the organization must pay). The ratings help to determine between the types of risk a lender will be taking. The duration of the bond is between 1-30 years. In general, interest is paid at a fixed rate determined at the time of issue. It is not locked in, however if you want to sell your bond before your maturity date, you will not get all the interest and may sell it for cheaper than it’s worth (depending on the national interest rate). When the Bank of Canada lowers its interest rate, bond prices go up. When it increases its interest rate, bond prices will go down. Why? When the interest rate decreases, your bond will have a higher rate of return then what is being sold in the market, making it more desirable to other investors and ultimately worth more and vice-versa.
When you invest in a mutual fund, you are part of a large group that owns parts of many companies. You can invest in one mutual fund but in return get a diverse portfolio. A diverse portfolio means that you may be investing in many different companies, industries and countries. For example, in one mutual fund you can have up to 100 different companies that you are investing in (amounts vary between mutual funds). Investing in a mutual fund will also make investing easier to afford. With everyone pooling their money together, companies like Apple and Google for example, are easily obtained by the investors. It is important to note that, although there are upsides to investing in a mutual fund there is also some downside, depending on how you look at it. When investing in a mutual fund, you will have to pay a fee to the fund manager, known as an MER (management expense ratio). This may not be a bad thing as fund managers are experts and will be focused on making profits so more people will invest in their fund. However, understanding the cost of investing is important in every successful investor’s life.
Mutual funds are not intended for short-term or quick growth. They are focused on growing the fund at a steady rate and are more of a long-term investment. Mutual funds vary in risk level. There are funds ranging from low to high risk. The risk is all dependent on the different holdings that are in your mutual fund, investment strategies and styles. It is important to note that mutual funds do not trade like stocks. They can only be traded at the end of the business day.
ETF’s (Exchange Traded Funds) are almost like a mixture of stocks and mutual funds. They are like stocks in the way that they trade on an exchange throughout the trading day. The way they resemble mutual funds, is by representing a portfolio of securities. The main difference is that ETFs only track a specific index or commodity, so you do not get a portfolio as diverse as you might with mutual funds. The risk range of an ETF is between moderate to high.
Stocks can be a more volatile investment path. They offer more risk as the value of stocks can fluctuate significantly on a daily basis. At the same time, this could give you a more meaningful financial reward. They are used in accounts with a risk tolerance that range from moderate to very high. When you invest in stocks, you become a shareholder. Companies issue shares, and each share is a small piece of ownership in the company. If the company makes money, the value of the shares may go up, but if they lose money the share prices may go down. Another factor in the value of stocks, is how “sought after” a company share is. If there is major “want” in the market for a certain stock, the price of the stock will rise because of supply and demand.
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