Guaranteed Investment Certificates (GICs)
GIC stands for Guaranteed Investment Certificate. It is a type of investment that guarantees a fixed rate of return over a fixed period of time. In Canada these products are guaranteed by the government.
GIC terms can range from as short as 30 days to as long as 10 years. GIC laddering takes advantage of these varied terms to reduce interest rate risk. It involves investing in a series of GICs with different maturity dates. This ensures that some of the investment is always maturing, so that the investor can take advantage of rising interest rates.
Interest rates on GICs vary depending on the length of the investment term and the financial institution. Generally, longer-term GICs offer higher interest rates than shorter-term GICs.
A redeemable GIC is a type of GIC that can be withdrawn before the end of the investment term. However, there may be a penalty for doing so. A non-redeemable GIC is a type of GIC that cannot be withdrawn before the end of the investment term. These carry higher interest, all things being equal.
The minimum investment amount for GICs varies depending on the financial institution. It is generally between $500 and $5,000.
The Different Types Of GICs
There are a few different types of GICs, including: fixed rate, variable rate, cashable, and non-cashable.
Fixed rate GICs offer a guaranteed interest rate for the entire term of the investment. This means that the investor knows exactly how much money they will earn, and can plan accordingly.
Variable rate GICs also offer a guaranteed interest rate, but the rate can change over time. This means that the investor’s earnings may be higher or lower than expected, depending on market conditions.
Cashable GICs can be cashed in at any time, without penalty. Non-cashable GICs cannot be cashed in early, and may have a penalty for doing so.
What The Benefits Of Investing In A GIC Are
There are several benefits of investing in a GIC, including: safety, liquidity, and flexibility.
GICs are a safe investment, since the interest rate and capital is guaranteed. This means that the investor does not have to worry about the value of their investment fluctuating.
Some GICs are also relatively liquid, meaning they can be cashed in relatively easily. This is helpful if the investor needs access to their money for an unexpected expense.
Finally, GICs offer flexibility, since they come in a variety of terms and interest rates. This allows the investor to choose an investment that meets their specific needs.
The Risks Of Investing In A GIC
The two main risks of GICs are interest rate risk and inflation risk.
Interest rate risk is the risk that interest rates will go up, and the relative or real value of the GIC will therefore go down. This is a risk with all fixed-income investments.
Inflation risk is the risk that the purchasing power of the money earned from the GIC will be less than the purchasing power of the money when the GIC was purchased. This is because inflation decreases the value of money over time.
How GICs Are Different In Canada
There are a few ways that GICs are different in Canada, compared to other countries.
First, GICs in Canada are typically offered by banks, credit unions, and other financial institutions. They are also guaranteed by the government. In other countries, GICs may also be offered by government agencies or corporations.
Second, the minimum investment amount for GICs in Canada is usually lower than in other countries. This means that more people are able to invest in them.
Finally, GICs in Canada can have a longer term than those from other countries. This allows the investor to earn more interest over time.
Things To Consider When Choosing A GIC
When considering a GIC, it is important to take into account the following factors:
- The length of the investment term
- The interest rate
- Whether the GIC is redeemable or not
- The minimum investment amount
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