Understanding investment basics

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    Key points

    Investing might seem complicated, but once you understand a few key concepts, it becomes much easier to make sense of the different investment options available.

    With these fundamentals, you'll be better prepared to have informed conversations with your advisor and understand which types of investments may be appropriate for your goals and risk tolerance.

    Types of investments

    Guaranteed investment certificate (GIC)

    A GIC is a low-risk investment that guarantees your principal (initial investment), plus interest, after a set period of time (at maturity). GICs can offer either a fixed or variable interest rate and are a good option for investors who want stability and predictable returns.

    Fixed income (bonds, debentures)

    Fixed income investments, such as bonds, are loans made to governments or companies. In return for lending your money, you receive regular interest payments, and your original investment is typically repaid at the end of a set period.

    Equity (stock, shares)

    Equity represents a fractional ownership stake in a company, denominated in “shares” and traded on a stock exchange. If the company grows over time, your investment may grow too. If it performs poorly, the value of your investment may decline.

    Mutual funds

    A mutual fund represents a pool of money from many investors. This money is professionally managed and may be invested in stocks, bonds, options, cash equivalents and/or other securities.

    Alternative investments

    Alternative investments are investments outside of traditional stocks and bonds. They can include assets such as real estate, infrastructure, commodities (like gold or oil), and other investment strategies designed to help diversify a portfolio. Alternative investments may involve different risks than traditional stocks and bonds, including liquidity, valuation and complexity risks, so investors should review their suitability with an advisor.

    Exchange traded funds (ETFs)

    An ETF is a pooled portfolio that typically holds assets such as stocks, commodities or bonds. As their name suggests, ETFs trade on stock exchanges and their values fluctuate throughout the trading session more or less in line with the total value of their holdings.

    Managed solutions

    A managed solution combines different investments into a single portfolio that is professionally managed for you. These portfolios are designed to match a range of investment goals and risk tolerance, making it easier to build and maintain a diversified portfolio.

    Segregated funds

    A segregated fund is an investment product offered by an insurance company that, like a mutual fund, invests in a diversified portfolio of assets. Unlike a mutual fund, it includes insurance features that can protect a portion of your investment at maturity or when you pass away. Segregated funds may offer added protection, but they often have higher costs than comparable mutual funds.

    Offering memorandum (OM)

    An offering memorandum is used for private securities investments that are typically offered to a smaller group of accredited or institutional investors. These investments may have higher risk, limited liquidity and fewer protections than publicly traded investments.

    Essential terms

    Return

    When you invest, your money may grow—or it may lose value. That overall gain or loss is called your return, and it can come from two main sources:

    • Income, such as interest earned on a bond or dividends paid by a company.

    • Capital gain/loss, which is the difference between the price you paid for an investment and the price you receive when you sell it.

    Risk

    Risk is the chance that an investment won't perform as expected. This could mean losing some of your money or seeing the value of your investment go up and down over time (volatility). In general, investments with the potential for higher returns also involve higher risk.

    Almost every investment involves some type of risk, even if your original investment is protected. For example, a GIC protects the money you invest, but because your money is locked in for a set period, you could miss opportunities to earn higher returns elsewhere. This is known as opportunity risk.

    Diversification

    One way to manage risk is to spread your money across different types of investments. This is called diversification.

     There are two common ways to diversify:

    • Portfolio diversification: Instead of investing in just one or two companies, you spread your investments across companies in different industries. This can help reduce the impact if one company or industry performs poorly.
    • Asset allocation: Instead of investing only in stocks or only in bonds, you hold a mix of different investment types, such as stocks, bonds, cash and other investments. Because these investments don't always perform the same way at the same time, diversification can help reduce the overall risk in your portfolio.

    While diversification helps in managing risk, it does not guarantee a profit or protect against loss.

    Liquidity

    Liquidity refers to how quickly and easily you can turn an investment into cash if you need your money. This can be important if you think you'll need access to your money in the near future.

    Highly liquid investments include savings accounts, as well as many stocks, ETFs and mutual funds.

    Some investments may take longer to sell or may need to be sold at a lower price. For example, cashing out of a GIC before it matures may result in a penalty or may not be allowed, depending on the terms of the investment.

    Risk tolerance

    Risk tolerance is your comfort level with the possibility of losing some or all of your investment. Some investors prefer investments with less risk, while others are comfortable taking on more risk in exchange for the potential for higher returns.

    Your risk tolerance depends on several factors, including:

    • When you'll need your money.
    • How comfortable you are with short-term ups and downs in the value of your investments.
    • Your financial situation, including whether you have an emergency fund and can meet your financial obligations without relying on your investments.

    Understanding your risk tolerance can help you and your advisor choose investments that are appropriate for your financial goals.

    Investment costs

    Investment costs are an important part of investing. They can vary depending on the asset class, investment product and advice or service model you choose, so it’s worth understanding what you pay and how those costs may affect your returns over time. For a deeper look, read Understanding mutual fund fees.

    Talk to a financial advisor to learn more about which investments suit your financial goals.


    Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Unlike mutual funds, the returns and principal of GICs are guaranteed.

    The content of this article (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it. This should not be construed to be legal or tax advice, as each client’s situation is different. Please consult your own legal and tax advisor.