Many of us have heard the term “investments” used in many ways - and it’s a concept most of us are familiar with to some degree. But unless you have really taken an interest in the markets or set aside time to study them, you may not have a total understanding of what investing is, everything involved with investing or what different types of investments are out there. But before you do a deep dive into theories, past performances or principles, it is important to get you up to speed with the basics of investing. Below we discuss, what investing is, the risks associated with investing, common types of investments, and other basics you should know as you look to grow your financial knowledge.
What Is Investing?
In its simplest form, investing is the process of giving money to another entity (such as the government or a company) with the hope that they will return more money to you (a profit) at a later time. Sounds simple right? Well, giving your money to another entity comes with a variety of risks and rewards. It's important for investors to weigh these risks and rewards to see if investing is worth it.
According to the Financial Consumer Agency of Canada, risk refers to “the potential of losing your money when investing, or the level of uncertainty regarding what you will earn or lose on your investment.”1
How does this relate to investments? Well, most of us are familiar with the phrase high risk, high reward. This is the also true when investing as typically, the higher the risk of an investment, the greater the potential reward. Every investment vehicle and product comes with its own set of risks, from determining how quickly an investor will be able to access their money when they need it, to figuring out how fast their money will grow where it is.
Every investor has their own unique tolerance for risk. A common determining factor may be a person’s time horizon, such as how far away they are from retirement, or how close they are to needing access to the money invested. Another factor could be considering how much money you are willing to risk losing without affecting your lifestyle or jeopardizing your needs.
If Investing Is a Risk, Why Do It?
Due to inflation, the value of a dollar in your hand (or under the mattress) today is worth more than a dollar in your hand tomorrow. The value of money is continuously deteriorating - which is what makes investing an appealing choice for many. The idea is to put a certain amount of your dollars in a place where they’re expected to earn more in the future (assuming a positive return is earned) than a dollar left sitting in savings.
Common Types of Investments
You’ve likely heard of the term “diversification” in regards to investing. Diversification refers to having a variety of different asset classes or investment types in your portfolio. Diversification is an important strategy many investors use to help reduce the risk of their portfolios.
Below are a few of the most common investment options you could use to help diversify your portfolio:
- Stocks: Giving your money to a specific company, earning you a share or piece of the company in return.
- Mutual funds: Using a professional money manager, pooling your money together with other investors and purchasing a group of stocks, bonds or a mix of both in a single transaction.
- Exchange-traded funds: Index funds that can be traded on an exchange throughout the day, as the prices of stocks fluctuate.
- Canada Savings Bond (CSB): Loaning your money to the federal government, with a minimum guaranteed interest rate for a three-year period.
- Guaranteed investment certificate (GIC): Your initial invested capital is protected, meaning you won’t lose money on the investment.
Whether you’re interested in taking a do-it-yourself approach or you’re looking to work with an advisor to develop a tailored portfolio, knowing the basics of investing such as what investing is, how diverse your options are and the risks involved with seeking returns are crucial to understand. Feel free to reach out to one of our trusted financial professionals to learn more about investing.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.