If you’ve read the article on Intro to investing in Canada and feel ready to learn more about investing, you’re in the right place.
I’ve read few books about investing in the stock market however, I do not claim to be a financial advisor and anybody should form their own opinions about their investments. When you go into your appointment with your financial advisor, s/he will be better equipped to answer questions and help you with your goals. However, here’s what I’ve learned from my experience as a new investor in Canada and from going to multiple meetings at the bank.
In Canada, you can get interests from your savings account, CIGs (guaranteed investment certificate), CSBs (Canada savings bonds). You can buy shares from a company (stocks, mutual funds) or directly invest in a (small or large) business. You can also invest in properties, including real estate, metals, coins, stamps, art, vintage objects…
Bonds and bills
The safest investments with the lower risks are bonds. The regular bonds come from the federal government, government agencies, provinces, cities and companies. When the government needs money, it issues somegovernment bonds and pays interest payments called coupon payments. You can get federal, provincial or municipal bonds. The larger the scale of the bond, the safer it usually is. For example, federal bonds are safer than municipal bonds.
The complex bonds include strip bonds, index bonds and real return bonds.
Strip bonds can be bought at a discount and offer a higher yield than regular bonds, however there are tax disadvantages outside an RRSP, TFA or RRIF.
Index bonds can be bought for long-term because they keep up with inflation.
Real return bonds also keep up with inflation and you’ll receive interest payments twice a year. There are tax disadvantages outside an RRSP, TFA or RRIF.
Treasury bills have a maturity of one year or less and they are also regarded as secure investments. Since bonds and bills have low risks, they typically pay low interest rates.
Canada Savings Bonds (CSBs)
Canada Savings Bonds are issued by the Bank of Canada to manage national debt. They started after World War I and again after World War II to help the federal expenses. They can be bought by people seeking a low-risk investment plan for as low as $100CAD. Although, they were discontinued in 2017, the Canadian government continues to honor and fulfills the existing bonds until their maturity. You can get them online or through your bank. The good thing is that if you cash it within 3 months, you do not pay interests. You can also cash it once a year but pay more.
Guaranteed Investment Certificates (GICs)
GICs are also a safe investment for the long term and there’s no cost to set it up. Older people usually invest in GICs for retirement because their initial investment is never lost if you choose a plan that’s less than 5 years. Moreover, the return is guaranteed between 0.4-2% and insured by the Canadian Deposit Insurance Corporation (GDIC) in case the seller goes bankrupt. You can get them for at least $500.
The catch is that your money is “locked” for a certain period of time, so you’ll have to wait or pay a fee if you need it sooner. The reason why they’re not as appealing is that some savings accounts can provide similar interest rates and your money is fully accessible. Moreover, the interests are fully taxable.
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Stocks, Shares and Equities
Stocks, shares and equities are used interchangeably. Owning stocks means that you own part of a company or corporation. This means that you have to deal with the prices and returns of the company, whether they’re up or down. Stocks are pretty risky as there’s no guarantee that you’ll ever see your money again. You could lose everything; therefore, you should read about the economy of this specific market you’re investing in.
The positive side is that a good investment can bring you amazing returns since the risk is high. You should invest in things you understand and keep away from things you have shallow knowledge in. As Warren Buffet said, “risk comes from not knowing what you are doing.”
Learn how to make money in stocks by practicing with simulations of the market here. You can learn the fundamentals of virtual stock exchange markets in different categories. This book also gives useful tips to find winning stocks and maximize your gains. It also gives you a list of the most common mistakes as an investor. Read, read, read… and you’ll get a better intuition for your investments.
Mutual funds
A mutual fund is a collection of investments ranging from stocks, bonds and other assets. They’re managed by professional money managers (they don’t receive commission on transactions) who allocate the fund in order to favor the clients’ interest or not. The advantage is that you can sell them at any time and most banks have available mutual funds.
Depending on the portfolio you pick through your bank, you’ll have to pay a management expense ratio (MER) that is deducted from your investments. It should be around 2% per year. MER tend to be lower if you pick an online platform rather than a physical bank. The MER follows the trends of the market and can increase or decrease since it’s a percentage. This fee goes towards paying the person managing your fund who is renumerated based on the number of funds they manage and not how valuable your portfolio gets. Beware of extra fees when buying mutual funds, make sure you keep asking questions if you aren’t sure.
Mutual funds are a great investment for regular individuals to have access to a diverse portfolio at a low price. Indeed, your money is split between several investments, meaning that the risk is lessened. There are several types of mutual funds depending on their risk but you’re basically buying a mutual fund for its performance. They can also cost annual fees called expense ratios, or sometimes commissions so make sure you’re aware of these expenses. Owning stocks to a company gives you rights whereas owning mutual funds won’t give you any.
Exchange Traded Funds (ETFs)
ETFs are funds that you can either control or let someone manage for you. They’re similar to mutual funds because they offer a lot of diversification in your portfolio but they’re riskier. You pay a smaller MER than mutual funds (between 0.10-0.7%) but your return isn’t automatically reinvested like mutual funds, you have to do it yourself. You may talk to your financial advisor about getting ETFs in your registered account (TFSA, RRSP etc).
How to recognize a trusting financial advisor?
Going to a well-known bank doesn’t mean you’ll get the best customer service. It’s important that you trust your financial advisor as s/he’s managing your investments aka your future. Don’t hesitate to “interview” this person before signing up for an account. Make sure you can trust them as a person with integrity and honesty and as a professional who has your best interest in mind. You can also look them up on LinkedIn and learn about their background. You can also ask how they paid (commissions, bonus, etc) and what would be their approach with money. You may take your time and consult several advisors to give you an idea of how one would manage your money. Knowing your financial goals is key, so pay attention to how they frame your portfolio. Does it fit your timeline, and does it respect your risk tolerance? Do you feel comfortable overall spending time in his/her office?
In conclusion, there are several types of investments in Canada. Depending on your financial knowledge, your age, your risk tolerance and your timeline, you can decide to dedicate your money to a large variety of investments for your future. Government bonds, treasury bills, GICs and CSBs are very safe investments with low return whereas stock, shares and equities are riskier and can go either up or down easily. A good middle ground is to invest in mutual funds and ETFs because your portfolio is diversified, and your risk level is somewhat intermediate. Investing on your own takes time and practice. I’d advise reading the Intelligent Investor by Benjamin Graham for more detailed explanations on investing in the stock market. May today be a fruitful and wealthy day for you!