Types of Investments Available to Canadians
There are many different types of investments, including stocks, bonds, mutual funds, ETFs, real estate, and more. Each type of investment has its own set of risks and rewards, so it’s important to understand the basics before investing your money.
Stocks are ownership interests in public companies. They typically offer high potential returns but come with higher risks than other types of investments. Investing in stocks gives the potential for capital appreciation, the ability to receive dividends, and the ability to participate in corporate governance.
The main disadvantage of investing in stocks is the potential for capital loss. In addition, stocks are often more volatile than other types of investments, such as bonds, and they may be subject to regulations and other legal restrictions. You also run a risk of potential for loss of principal, volatility (which can be both an plus or a minus, but is negatively affecting most investors), and the potential for the stock to underperform other investments. An investor needs to be able to identify the difference between a good stock and a bad one.
The costs of investing in stocks are brokerage commissions, transaction costs, and capital gains taxes.
Bonds are loans that investors make to borrowers (such as corporations or governments).
The 9 advantages of bonds are:
- Bonds are considered to be a relatively safe investment, and therefore they can provide stability to an investment portfolio.
- Bonds typically offer higher returns than other types of investments such as savings accounts or money market funds.
- Bonds can be a good source of income, especially for investors who are retired or near retirement.
- Bonds can be sold prior to maturity, which can provide flexibility for investors.
- Bond prices are generally less volatile than stock prices, which can provide peace of mind for investors who are risk-averse.
- Interest payments on bonds are typically fixed, which can provide predictability for investors.
- Bonds are often considered to be a good diversification tool, which can help to reduce overall portfolio risk.
- Investing in bonds can be a good way to preserve capital, especially in times of economic uncertainty.
- Bonds can be a good hedge against inflation.
The 7 disadvantages of bonds are:
- Bond prices can decline in value if interest rates rise.
- Bonds are subject to credit risk, which means that the issuer of the bond could default on the interest payments or even the principal repayment.
- Bonds are also subject to market risk, which means that their prices can fluctuate in response to changes in economic conditions.
- Bond investors may have to pay taxes on the interest payments they receive, which can reduce their overall return.
- Investors in bonds may need to maintain a large portfolio in order to diversify their risk.
- Bonds can be complex financial instruments, and therefore, they may not be suitable for all investors.
- Bond investing can be a time-consuming process, and investors may need to dedicate a significant amount of time to research in order to make informed investment decisions.
mutual funds are pools of money that are managed by investment professionals. They offer diversification and professional management, but come with higher fees than other types of investments.
3. Exchange-Traded Funds (ETFs)
ETFs are similar to mutual funds, but they trade on exchanges like stocks. They offer lower fees than mutual funds but may be more volatile.
The 9 advantages of ETFs are:
- They offer investors exposure to a wide variety of asset classes and investment strategies.
- They are traded on exchanges, so they can be easily bought and sold.
- They are typically more tax-efficient than other types of investment vehicles.
- They typically have lower fees than other types of investment vehicles.
- They can be used to hedge against other investments.
- They can be used to construct portfolios with a desired risk/return profile.
- They can be used to gain exposure to hard-to-reach markets.
- They can be used to achieve specific investment goals.
- They can be used to access expert investment managers.
The 7 disadvantages of ETFs are:
- They can be more volatile than other types of investment vehicles.
- They can be subject to tracking error.
- They may not be suitable for all investors.
- They may not be available in all countries.
- They may be subject to regulations in some countries.
- They may not be able to be used to achieve all investment goals.
- They may have higher fees than other types of investment vehicles.
4. Mutual Funds
Mutual funds are pools of money that are managed by investment professionals. They offer diversification and professional management, but come with higher fees than other types of investments. Unless you are completely unwilling or unable to inform yourself about Stocks, Bonds or ETFs, Mutual Funds should be avoided. They tend to underperform other asset classes mentioned here, as a category.
5. Real Estate
Real estate is property that can be used for investment purposes. It can offer high returns and stability, but is a more illiquid investment than other types of assets.
The 6 advantages of Real Estate are:
- Real estate can appreciate in value over time, providing the investor with potential profits.
- It can be a steady source of rental income.
- It usually provides tax advantages, such as deductions for mortgage interest and property taxes.
- Real estate can be a hedge against inflation.
- Real estate is a tangible asset that can be sold or borrowed against in the future.
- Real estate can provide a sense of security and stability.
The 5 disadvantages of Real Estate are:
- Real estate can be a volatile investment, subject to sudden changes in market conditions.
- Real estate can be a illiquid investment, meaning it can be difficult to sell if the need arises.
- Real estate can be a costly investment, requiring the investor to put up a large sum of money upfront. Use our Mortgage Calculator to help you plan accordingly.
- Real estate can be a time-consuming investment, as the investor may need to manage the property and deal with tenants.
- Real estate can be a risky investment, as the value of the property may decrease over time.
There are many other types of investments, and each has its own set of risks and rewards. It’s important to understand the basics before investing your money.