Five Common Investment Categories
While there are thousands of different kinds of investments to choose from, there are five common categories called “asset classes.”
1. CASH EQUIVALENCIES
Cash equivalencies like Canada Savings Bonds and cash-like investments are generally secure investments that provide you with quick access to your money. Because of the low risk related to these types of investments, they’ll generally have relatively low rates of returns.
Why Pick a Cash Equivalency? They provide security and access. You might choose to keep money in cash because you need it in the short-term to make a purchase, or if you think there’s too much risk in the market. In the long-term, though, cash equivalencies won’t help very much in growing a portfolio.
A special bond that the federal and some provincial governments issue with a set rate of interest. As of November 1, 2017, the Government of Canada is no longer offering the sale of Canada Savings Bonds or Canada Premium Bonds.
Money Market Funds
A mutual fund that invests in short-term fixed income debt securities, including commercial paper (representing a short-term loan to a corporation) and treasury bills (T-bills), which is a short-term debt instrument issued by a government. Some specialize in Canadian or U.S. investments, or invest only in T-bills.
Guaranteed Investment Certificates (GICs)
An investment that works like a special kind of deposit which pays a set rate of interest for a set length of time. Some GICs base your return on a benchmark, such as a stock exchange index.
2. Fixed Income Securities
Fixed income securities are investments based on the straightforward concept of lending and borrowing. When you buy a bond, you are essentially lending your money to the government or a corporate borrower who then pays you a fixed interest rate until eventually paying you back the full “face value” of the bond at the end of the term. Fixed income securities are often less liquid than cash equivalencies.
Why Pick a Fixed Income Security? They’re relatively safe, often offer a guarantee and better rates of returns than cash-equivalent investments.
A bond issued by a federal, provincial, or municipal government.
A bond issued by a company.
An bond-like investment where you lend money to a government or company based only on their reputation; however, unlike a bond, the borrower does not back the loan with any collateral.
Equities are most often known as stocks or shares and represent part ownership of a business – sometimes to the extent where you are entitled to vote at shareholder meetings. Returns from equities come in two ways: profits from the business called dividends or by selling shares whose value has grown.
Why Pick Equities? They carry higher risk but they can help significantly in building your savings.
Common shares provide investors ownership in a company and offer the potential for both growth and loss; and may give investors certain voting rights on company matters. In the event of a company liquidation, common shareholders have the lowest claim on company assets.
Preferred shares offer investors a greater claim on a company’s earnings and assets, but still carry the risk of losses. Preferred shares are issued with specific terms of payment in the form of dividends, but generally do not have voting privileges.
Typically issued by mining and oil and gas companies, they allow exploration and development (E&D) expenses to be considered to be the taxpayer’s expenses for tax purposes. Generally, the purpose of the flow-through share is to help early stage companies finance their E&D costs while aiding investors in reducing their tax bill. Like common shares, investors are still at risk of losing the value of the equity should the company not perform well.
4. Investment Funds
Investment funds are professionally managed (by an investment fund manager) so fees apply but the investment is designed to provide you with a broad selection of opportunities. Your investment is pooled into a fund and then invested into a diverse combination of assets.
Why Pick Investment Funds? They offer built-in diversification, are professionally managed, and easy to both buy and sell.
Exchange-Traded Funds (ETF)
A fund that trades on a stock market; most ETFs track an index, such as a stock index or bond index.
An pool of money that’s invested for a large number of investors by a professional money manager. A mutual fund is the most common type of investment fund.
A market-based investment sold by life insurance companies. They are insurance contracts which invest in a diversified group of securities such as stocks, bonds and mutual funds.
5. Alternative Investments
These unconventional and complex investments include things like options, futures, foreign currencies, hedge funds, gold, and real estate. They usually offer high potential returns, but also higher-than-average risk and are typically held by institutionally accredited or higher net-worth investors.
Why Pick Alternative Investments? Since they don’t necessarily correlate to the stock market, they can be good to diversify a portfolio and mitigate volatility – but are also complex and higher risk.
Private equity is composed of funds and investors that invest directly in private companies. As the companies are not listed on an exchange, these investments can be difficult to sell.
A derivative is a financial instrument (or contract) with a price that is dependent upon, or derived from, one or more underlying assets. Its value is determined by fluctuations in the underlying assets, such as stocks, bonds, and commodities currencies.
An investment pool that uses advanced investment strategies that are not generally permitted for traditional investments, such as the use of derivatives.
A commodity futures contract is an agreement to buy or sell a predetermined amount of a commodity at a specific price and date in the future.