Investing 101: Quick and Dirty Introduction to Investing
I’ll start off by saying I am by no means an expert on investing and a lot of what I’m about to write has been passed on to me from individuals infinitely more qualified than I am. These suggestions merely highlight the usual pros/cons associated with various investment vehicles and I encourage anyone interested in a particular product to do additional research beforehand.
Debunking the myth
One of the biggest misconceptions about investing is you need money to make money. While it is true having more money gives you greater opportunities to invest, it doesn’t take a lot to start somewhere. Personally, I started “investing” when I was 13; my mom helped me open up a ING Savings Account (now known as Tangerine) to get access to higher interest rates. Back then, the online bank was offering 3% on deposits, which nowadays would be considered a half-decent return.
Weighing the options
In 2016, Canadians have a plethora of investment options to choose from ranging from stocks, ETFs, mutual funds, GIC, bonds, and other financial vehicles. What’s important to remember is that no matter the product, you can evaluate them along two criteria:
- Its rate of return
- Its risk profile
Some products offer a 100% guarantee whatever you put in will give you back a modest return; others have the potential to provide significant monetary gains, but include greater risk and volatility. Figuring out what your risk profile will define how you will invest and in turn influence the type of options you’ll prefer.
Here are three of the most common options available, going from least to most volatile:
1) Guaranteed Income Certificate (GIC): These financial products offer individuals the greatest amount of security and provide a great deal of certainty. Offering a range of modest interest rates, GICs require you to put money aside for a pre-determined amount of time and offer you a fixed interest rate for the duration of the term (terms range from as low as 90 days up to 5 years). Depending on whether the GIC is Redeemable or Non-Redeemable (i.e. whether you can withdraw the deposit before the full duration of the GIC or not), you can generally expect a return between 0.5% to 2%.
2) Mutual Funds: Mutual funds can be described as a basket of investment vehicles that offer you the benefits of many for the cost of one. Flexing economies of scale, banks offer a range of mutual fund products that allow you to invest in the market without taking on the individual risks of investing in a specific company. Depending on risk profile, mutual funds will be composed on a range of stocks from Canadian and American companies balanced by a selection of bonds. Because bonds offer greater security than stocks and tend to offer fixed interest rates, the more bonds a fund is composed of, the lower returns and volatility. Alternatively, there are funds that are exclusively composed of stocks, offering the potential for both significant returns and losses. Depending on the institution, you will usually be charged between 2–3% in management fees by your financial advisor, cutting into whatever returns you make. Most mutual funds tend to provide a return between 5% to 20% depending on their stock/bond composition.
3) Stocks: Usually the first thing that comes to mind when it comes to investing, stocks are the bread and butter of most individuals’ investment knowledge. Publicly-traded companies give individuals the opportunity to buy shares in their company. By far the most volatile and lucrative of three, stock prices change on a day to day basis and offer no guarantee on returns. While relatively stable companies do offer dividends (quarterly payouts to shareholders) like banks, there is always the chance for values to go down significantly over a short period of time. Key thing to keep in mind when looking at stocks are the trading fees, as they can eat away at your returns. Ranging as cheap as $5 at discount brokerages to as high as $20 with banking institutions, the benefits of each will depend on how often you intend to buy and sell stocks.
Putting it all together
While all three have a place as investment vehicles, what you’re largely looking at are the risk/rewards associated with trading security with uncertainty. GICs are guaranteed to give that 1.5% for three years, but you won’t be making significant gains towards your nest egg. Keeping in mind that inflation usually is between 0.5%-1%, it means the value of your dollar is barely keeping up. Alternatively, most banks now let you invest in mutual funds with amounts less than $50, so it can be a great starting point for individuals open to a little bit of volatility for greater returns. Stocks offer the greatest upside, but generally require a minimum balance of $1500 to open up a trading account.
In any case, investing can be a great opportunity to let your money work for you and position yourself well for your future financial goals. The earlier the better!
