Many investment products are available to help you reach your financial goals, whether it’s saving for your child’s education or saving for your retirement.
In general, an investment product will fall into one of five main categories called asset classes:
- Cash and cash equivalents
- Fixed income securities
- Investment Funds
- Alternative Investments
Each asset class has different characteristics and level of complexity. Each earns money differently and has different fees and risks. Each also has their own tax considerations. For example, the timing and amount of taxes you pay on any earnings may change if the investments are held in or out of a registered plan, such as a registered retirement savings plan (RRSP), a tax-free savings account (TFSA) or a registered education savings plan (RESP). It’s important to know which account(s) works best for you and your financial goals. For more detailed information on risk, return and costs, check out the Canadian Securities Administrators Investments at a glance brochure. A tax professional can provide more information about registered plans and tax considerations. You can also find more information about registered plans on Canada Revenue Agency’s website.
It’s important to note all investments come with risk – the possibility of losing some or all of the money you have invested. Before investing, it is important to understand what you are investing in, including how the investment can make or lose money, any fees, and whether that investment fits with your goals and risk tolerance. Remember, there’s no such thing as a high return, risk-free investment. Generally, if you want higher returns, you should be prepared to accept the higher risk that goes along with them. Understand what types of investment risk could impact the product you’re considering. To learn about types of investment risk, check out our guide “9 Types of Investment Risk – A Guide for New Brunswick Investors”.
Working with a professional
There are many different titles and designations used by financial professionals, but they do not mean a person is registered or licensed to sell or give advice on specific investments or insurance products. Generally, anyone selling securities, offering investment advice or acting as an investment fund manager in New Brunswick must be registered with FCNB. To check if a firm or individual is registered, and the type of products or advice they can provide, use the National Registration Search tool, or contact us directly.
A registered investment professional can help you assess your financial needs and goals, build a portfolio and recommend suitable investments for you. Learn more about working with a financial professional. Your investment professional can also provide you with disclosure documents, such as a prospectus or a mutual fund’s Fund Facts. These documents contain important facts about the investment product being sold, the risks involved and how the money raised from the sale will be used. You may find many of these documents on sedar.com. You can also find information about the companies you invest in from a variety of other sources but, be critical of what you read and never base your decision to invest solely on websites, unsolicited emails or company news releases.
You could also choose to use a robo-adviser. Robo-advisers are automated online platforms that provide investment advice based on algorithms and information you provide about your financial situation and goals. Results may vary between robo-advisers depending on their individual algorithms and the quality and thoroughness of information that the individual investor provides. Learn more about robo-advisers below.
Explore investment products in the following asset classes:
Cash and Cash Equivalents
This includes money in your bank account and investments that are like cash because they are generally considered less risky and may give you quicker access to your money. They may have relatively low rates of return because they are less risky than other kinds of investments. Guaranteed Investment Certificates (GICs) are an example of a security found in this asset class.
Guaranteed Investment Certificates (GICs)
GICs are certificates of deposits at a bank, trust company or credit union for a fixed period of time. Terms typically range from 30 days to 10 years. The end of the term is known as reaching maturity.
You can choose between two types of GICs: interest-bearing and index-linked. Interest-bearing GICs pay a fixed rate of interest to maturity. The rate of return on interest-linked GICs may vary based on the performance of an index, such as a stock market index. Most GICs must be held to maturity, but some may allow you to redeem early. You may have to pay a penalty with early redemptions.
GICs are guaranteed by the issuer (for example, financial institutions). In addition, the principal (your original investment amount) may be insured up to certain limits by a deposit insurance agency, like the New Brunswick Credit Union Deposit Insurance Corporation or the Canadian Deposit Insurance Corporation (CDIC). However, if the GIC’s return is tied to an index, there may be a risk that interest payments will be lower than expected, or there may be no interest payments at all.
Fixed Income Securities
Fixed income securities are like a loan – you lend your money to a government or company for a certain period of time and, in return, they promise to pay you a fixed rate of interest throughout the life of the security. Government/Corporate bonds are an example.
A government or corporate bond pays a fixed rate of interest for each year to maturity and repays the “face value” at the end of the bond’s term (its maturity date). The face value (or par value) is the value at which the bond was issued.
A bond’s term can range from one to 30 years. Bonds tend to offer better rates of return than cash equivalent investments, such as GICs, because you are taking on more risk by lending your money for a longer period of time. As with any investment, generally higher-return rate bonds carry higher risk and have no guarantees you will get your money back.
In addition to interest payments, you could also earn money on your bond if you sell it for more than you paid. Generally, when interest rates go down, the value of a bond goes up. By selling the bond in this situation, you may get more than you paid for it. You will also have the interest payments you received while you held the bond. When interest rates go up, however, generally the value of a bond decreases. By selling the bond in this situation, you may get less than you paid for it.
You could also lose money if the bond issuer is unable to pay you the interest payments. If the company is dissolved, bondholders may have a right to a portion of the company’s remaining assets; however you may not get back all or any of the money you originally invested.
When you buy stocks (also known as shares or equities), you become a part owner in a business or a ‘shareholder.’ In general, equities carry more risk, but can also provide a higher potential return. You can make money on a share in two ways:
- if the share increases in value
- if the company pays a dividend
Dividends may be paid out to shareholders if the company has made a profit and allocates some of the profits to its shareholders. The amount you receive depends on various factors, including how many and what kind of shares you own. There is no guarantee that the company will pay dividends each year, and no guaranteed amount.
The value of a share can fluctuate – sometimes frequently and sometimes by a lot. This is because shares are exposed to various types of market risk including the size of the market, financial stability of the company, general economic conditions and exposure to fluctuations in currency values. If you sell a share for more than you paid for it, you will have a capital gain. If you sell it for less, you will have a capital loss.
As a common shareholder, you are generally entitled to:
- dividend payments
- voting rights to elect directors and to vote on certain major corporate decisions at shareholder meetings
- a claim on remaining company assets if the company dissolves (after tax authorities, bond holders, employees, creditors and preferred shareholders).
Unlike common shares, preferred shares have restricted or no voting rights, but they may come with special features, such as the right to redeem shares at certain times or to convert them to common shares at a certain price.
As a preferred shareholder you are generally are entitled to:
- fixed dividend payments (paid before common shareholders)
- a claim on remaining company assets if the company dissolves (before common shareholders, and up to the face value of their shares).
You can buy equities through an investment professional or a firm registered with FCNB. A full-service dealer will offer advice and charge a commission for its services each time you buy or sell shares. More experienced investors may use a discount broker. This type of dealer charges lower fees, but does not provide any advice. This may expose investors to higher risk if they do not take the time to read and fully understand all important documents associated with the investment.
Investment funds are a collection of investments from one or more asset classes. When you buy an investment fund, you’re pooling your money with other investors. This allows you to invest in a variety of investments for a relatively low cost and leave the investment decisions to a professional manager. Examples in this asset class are mutual funds and exchange-traded funds.
Mutual funds are a collection of shares, bonds or other types of investments. Different types of mutual funds are available, including money market funds, bond funds, growth or equity funds, and balanced funds, among others.
A mutual fund’s value will change as the value of what it invests in goes up and down, and the risk associated with a fund depends on what the fund invests in. Depending on the type of fund, you might receive a distribution of dividends, capital gains, interest or other income types the fund earns on its investments. Most mutual funds will reinvest any earnings to buy more fund units for you. If you would rather receive the earnings in cash, you should talk to your investment professional. It’s important to note that the way you chose to receive the earnings and how you hold the investments (in a registered plan or not) can impact how your earnings are taxed. You can visit the Canada Revenue Agency’s website to learn more about registered savings plans, and talk to a qualified tax expert about how your investment choices may impact your taxes.
Details about the costs and the level of risk associated with a particular fund can be found in its Fund Facts document or the simplified prospectus. The Fund Facts document is an easy-to-read, three- to four-page summary of the fund. Mutual fund companies are required to give investors a copy of Fund Facts before they decide to purchase a conventional mutual fund. Fund Facts includes information about:
- Your costs: How much it costs to buy and own the fund.
- What you’re paying for: What portion of your fees are going to pay the investment professional.
- The fund’s risk level: How the fund ranks on a scale ranging from low to high risk.
- What you own: The shares and bonds the fund holds, and what percentage may be held in foreign securities.
- The fund’s history: How volatile the annual returns have been over the past 10 years. It may help you manage your expectations of the fund during market shifts.
The simplified prospectus is a disclosure document that gives investors important information about the mutual fund. They are no longer required to be sent automatically to investors; instead, they are available by request. Investors may also ask for a copy of the simplified prospectus before they invest.
It includes information about:
- A fund’s investment objectives and strategies
- What the fund invests in
- Who manages the fund
- Sales Charges
- Management fees
- Operating expenses
- Income tax considerations
Mutual funds are widely available through investment firms, fund companies and financial institutions. Costs and fees are associated with every fund, although they can vary. You may pay for administrative costs, management fees, or fees when you buy or sell a fund. It is important to understand not only what the costs and fees are, but also how they are paid and how they affect your return. For example, you don’t pay management fees or administrative costs directly, the fund pays these fees. But, these fees reduce the fund’s returns – what you get on your investment.
Most funds are offered in different series or classes, usually for different types of investors. The fees and expenses will be different for each series. Your investment professional can explain which series or class may be most suitable for you.
Exchange Traded Funds (ETFs)
ETFs are a collection of shares, bonds, commodities or other types of investments. They are traded on the stock market and are bought and sold similar to stocks. Like a mutual fund, an ETF allows you to diversify your portfolio. Typically, they follow an index, like the Toronto Stock Exchange, and are priced continuously throughout the day in real time. An ETF’s value and level of risk depends on and changes based on what the fund invests in. They are attractive to retail investors because of their low cost, diversification and share-like features, but some types are riskier than others.
Depending on what the fund invests in, you may receive a distribution of dividends, interest or capital gains. Unlike many mutual funds, ETFs do not reinvest your distributions in more fund shares or units. Generally, you have to instruct the investment firm in how you want to invest these earnings.
Earnings from ETFs are taxable. It’s important to note that the way you chose to receive the earnings and how you hold the investments (in a registered plan or not) can impact how your earnings are taxed. You can visit the Canada Revenue Agency’s website to learn more about registered savings plans, and talk to a qualified tax expert about how your investment choices may impact your taxes.
Leveraged ETFs are different from most ETFs. These ETFs use a strategy that uses borrowed money to increase the amount they can invest in the market to try to increase the potential return of an investment. Because of this, they carry additional risks than other ETFs. While potential gains are multiplied when the index goes up, so too are your losses if the index goes down. Leveraged ETFs are highly speculative, short-term investments.
You can usually buy and sell ETFs on a stock exchange, similar to buying stocks. Typically, you pay commissions and management fees to invest in ETFs. Discuss with your investment professional how these costs and fees impact your returns.
Details about the costs and the level of risk associated with a particular ETF can be found in its ETF Facts document. The ETF Facts document is an easy-to-read, summary of information about an ETF. Your dealer (the firm) is required to deliver the ETF Facts to you no later than midnight on the second business day following the purchase of ETF securities. You can also consult the ETF Facts on the website of the company offering the fund, or ask your investment professional for a copy. ETF Facts includes information about:
- Your costs: Information on the ETF’s management expense ratio (MER), which is a combination of an ETF’s management fee and its operating expenses.
- What you own: A snapshot of how the EFT’s investments are allocated.
- The ETF’s risk level: How the fund ranks on a scale ranging from low to high risk.
- The ETF’s history: How the ETF’s units have performed in each of the past 10 years (or in each of the years that have elapsed since its start date).
More Resources: Canadian Securities Administrators ETF Fact page
A prospectus is a disclosure document that gives investors important information about an ETF. They are no longer required to be sent automatically to investors; instead, they are available by request. You can generally find a copy on the fund company’s website or on SEDAR.com. Investors may also ask for a copy before they invest.
These are some of the most complicated types of investments. They have higher-than-average risk in return for higher-than-average potential returns. They are typically meant for very knowledgeable or affluent investors who can afford to take higher risk and get specialized advice. The fees may also be higher because these investments involve more hands-on research and on-going monitoring.
Product examples in this asset class:
- Securities crowdfunding
- Crypto assets
Securities crowdfunding (also known as equities crowdfunding) is a way for start-ups and small businesses to raise money for their early development stages by selling shares or another eligible security to investors. In return, investors receive securities from the business. This means they may become part owners of the company, as they would if they had purchased a share or stock on the stock market.
While securities crowdfunding can make local projects more accessible to New Brunswick investors, these projects come with certain risks that investors must be aware of before choosing to invest money. Learn more about the risks and protections in place for investors in securities crowdfunding.
Crypto assets exist online using interconnected computers to record balances and transactions. Crypto assets post a number of risks relating to volatility, security, transparency, valuation, custody and liquidity. They are highly volatile with unpredictable price fluctuations.
The regulatory framework regarding crypto assets and crypto-asset trading platforms is developing. Some crypto assets, particularly those offered as digital tokens through Initial Coin Offerings (ICOs), may be subject to securities regulation. Others may be derivatives and subject to the derivatives-related regulations adopted by securities regulators. If a crypto-asset trading platform facilitates the trading of crypto assets (or interests in crypto assets) that are securities or derivatives, that platform is required to comply with securities law. When someone selling a crypto asset or a related product suggests they don’t need to comply with regulations, be skeptical.
Online wallet companies and crypto-asset trading platforms are susceptible to cybersecurity threats and hacking, putting your money at risk. Without financial statements or other traditional assessment criteria, it’s hard to make informed decisions.