The list of investments for your money is endless. You could invest in real estate, comic books, baseball cards, or even an emu farm. We’ll be staying away from the collectables and animals today though. The common investments we’ll be examining are the products you might commonly find offered at your local bank, or by a financial adviser or broker.
We’re not recommending any of these products nor are we delving deep into the pros and cons of them. Our aim in answering this question is to provide a list of some of the common investments you might encounter and how they work. In future posts we will look more closely at a few of these investments, and we also encourage you to send us questions on any specific investment and we may include them in future posts.
A mutual fund is a specific type of investment fund; a collection of investments such as stocks and bonds. This collection of investments is owned by a group of investors and managed by a professional money manager. When you purchase a mutual fund, you are joining this group of investors. Mutual funds, unlike most other types of funds are open-ended. This means as more people invest in the fund, the fund can issue new units.
A mutual fund can focus on specific types of investments. For example, a fund could specialize and invest in stocks from large companies, or specific business sectors, or focus mainly on government bonds. There are also funds that are extremely diverse and invest in a variety of different investments.
Guaranteed Investment Certificate (GIC)
A GIC is an investment that offers a guaranteed rate of return over a fixed period of time. That period of time can range from 30 days to 10 years in most issuing institutions. Most GICs pay a fixed rate of interest to maturity, but there are also GICs with a rate of return based on the performance of an index. Most GICs must be held to maturity, but some can be redeemed early, often with a fee attached.
An equity, or stock as is it commonly known, gives the purchaser a stake in a business. This may also entitle the owner to vote at shareholder meetings and receive profits that is allocated to shareholders. These profits are known as dividends.
Equities make money by increasing in value or by paying a dividend. However, there is no guarantee an equity will go up in value or that the business will choose to pay a dividend. Equities can also decrease in value, losing money. When an equity is sold for more than you paid for it you have a capital gain. If you sell for less, you have a capital loss.
A bond is essentially a loan you are making to a company or the government. The bond is secured by the government’s tax base or by a company’s assets. The term on a bond can typically range from a year to 30 years. Interest on the bond is usually paid at a fixed rate. This rate is determined by current interest rates and the credit rating of the bond issuer.