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Types of Investments and Types of Accounts
There are many ways to invest. Your choices will depend on your goals, your timeline and your willingness and ability to accept risk. It’s important to know some basics.
Investing puts your money to work to achieve your financial goals. One way is to earn interest on a sum of money you invest. Another way is to make a return by purchasing an investment at a certain price with the goal of selling it later at a higher price. An investment advisor can guide you in choosing the type of investment that best meets your financial goals.
Types of Investments
An equity is a direct investment in a business, purchased through a stock or share. Investment advisors often help investors in choosing which stocks to buy based on their risk tolerance, investment objectives and other factors. You can make money on a stock if the stock itself increases in value or if the company pays a dividend to shareholders like you. However, the stock price can also go down and the company may not pay a dividend. A stock’s value depends on factors from the size of the company to its profitability and financial stability. The value of a stock can fluctuate – sometimes frequently and sometimes by a lot. This is because stocks are exposed to various types of 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.
A bond is a fixed-income security offered by governments and businesses. Buying a bond means that you are lending money to a company or a government (the bond issuer). The loan will be for a set period of time, which is called the term. Over the term of the bond, the bond issuer will typically pay you interest. For example, many bonds have an interest rate that does not change over the term of the bond, which is called a fixed interest rate. At the end of a bond’s term, you can normally expect to receive back the original amount of money loaned, plus the interest accumulated on that loan over the term.
In addition to interest payments, you could also earn money on your bond if you sell it for more than you paid. Bond prices change based on interest rates. 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.
Bonds and other fixed-income securities have a range of interest rates and risk levels. With both corporate and government bonds, one risk to consider is that the rate of inflation may be higher than the interest rate paid by a bond, which would mean that your investment isn’t keeping up with the cost of living. Another risk to consider is that a particular bond issuer may not have enough money to repay their loans. If this occurs then you may lose some, or all, of the money you invested. Bonds that are riskier often pay a higher interest rate. These bonds are often called high-yield bonds or junk bonds.
A mutual fund is a pool of investments. It allows you to hold a portion of many more investments than you could normally purchase on your own. A professional fund manager decides where to invest the money and when to buy and sell investments for the mutual fund. Investors hold units of mutual funds. A mutual fund’s value will change as the value of what it invests in goes up and down. The risk associated with a fund depends on what the fund invests in. The price of your units will go up if the investments in the fund do well. If they are not doing well, the unit price falls.
Details about the costs and the level of risk associated with a particular fund can be found in its Fund Facts document. Costs and fees are associated with every fund, although they can vary. These fees reduce the return you get on your investment in a mutual 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. 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 advisor can explain which series or class may be most suitable for you.
Like mutual funds, exchange-traded funds (ETFs) are pools of investments. ETFs trade on a stock exchange and the process for buying or selling them is similar to buying stocks.
An ETF can invest in equities, bonds, or commodities, and may specialize by industry, sector, or country. ETFs can be attractive to retail investors because of their low cost, diversification, and share-like features. Like mutual funds the risk associated with a fund depends on what the fund invests in.
Details about the costs and the level of risk associated with a particular ETF can be found in its ETF Facts document.
Segregated funds are an investment product sold by life insurance companies. Segregated funds are similar to mutual funds; however, segregated funds provide a protection on your money that mutual funds do not. Even if the fund loses money, a portion of the money you invest is guaranteed (typically 75%-100%). For this guarantee to apply, however, you have to maintain your investment for a certain period of time. Segregated funds tend to have higher fees than mutual funds, and only advisors who are licensed to sell insurance can sell segregated funds.
Guaranteed Investment Certificates (GICs) are a lower risk investment that guarantees that you will get your deposited amount back. A GIC is a certificate of deposit at a bank or other financial institution for a fixed term, varying from six months to many years. GICs are guaranteed by the financial institution that issues them and are insured by deposit insurance agencies, like the Canada Deposit Insurance Corporation (CDIC) or the Credit Union Deposit Insurance Corporation (CUDIC).
Types of GICs
There are two main kinds of GICs: Interest-bearing GICs and Index-linked GICs.
Interest-bearing GICs pay a fixed interest rate over the course of the term. The primary risk of an interest-bearing GIC is that you may need the money before the term is up and have to pay a penalty or fee that will reduce your return, perhaps to zero. Another risk is that interest rates may rise while you hold a low rate GIC.
Index-linked GICs pay interest based on changes in a standard, such as a stock exchange index. The greatest risk for index-linked GICs is that you may not earn a return if the markets do not rise during the term. These GICs are higher risk than interest-bearing GICs because you don’t know your rate of return even though you know you will get back your principal.
Most GICs are designed to be held to maturity meaning you can’t sell them until the term is up. GICs that allow you to redeem before maturity may charge a fee or impose a reduced interest rate. Some GICs let you access your money any time, but these pay lower rates of interest.
Alternative investments are some of the most complicated types of investments. They can offer higher-than-average returns, but also come with higher-than-average risks. It’s important that you be comfortable with all risks and costs involved, and never invest in anything you don't fully understand. These are just some examples of alternative investments:
Crypto assets are digital assets that use cryptography (a method to secure data), peer-to-peer networking, and a public ledger to create, verify and record transactions. Crypto assets include cryptocurrencies, crypto funds and digital tokens. Bitcoin and Ether are examples of cryptocurrencies. Crypto assets are very risky. Changes in the crypto asset space are constant, and prices may change dramatically with little warning. If you chose to buy, sell, or speculate in crypto, be aware you could lose some or all of your funds. Learn more about the risks of crypto assets.
The right to buy or sell an asset at a specific price for a specific period of time.
A call option gives the holder the right to buy an asset at a specified price within a specified time. A put option gives the holder the right to sell an asset at a specified price within a specified time. The underlying asset may be a stock, a commodity, a currency or an index.
A contract where the seller agrees to deliver a specified amount of an asset to the buyer, at a specified price on a given date.
An interest in a partnership consisting of:
- a general partner who manages the partnership
- limited partners who provide the investment capital
Limited partnerships typically seek to achieve capital appreciation by investing in a specific industry sector (such as real estate or oil and gas). Flow-through limited partnerships invest in sectors that provide tax credits to investors.
An investment pool that uses advanced investment strategies not generally permitted for traditional mutual funds, such as leverage, long and short positions and derivatives.
Investing in different currencies to make money on changes in exchange rates. Also known as "forex" or "FX trading".
For more information, on types of investments read the CSA brochure Investment Products at a Glance (PDF).
Types of Investment Accounts or Savings Plans
Before opening an investment account or savings plan:
- Check to see what types of investments you can purchase through the account and your advisor.
- Ask questions about the different types of charges and fees related to the investments and the account.
- Shop around to compare fees and other charges at other firms.
For more information on savings plans including more details on their tax treatment and contribution limits you can refer to the Canada Revenue Agency website or speak to an investment advisor.
A Registered Retirement Savings Plan (RRSP) lets you save or invest for your retirement. Contributions are usually deductible and can help reduce your income tax. The amount you can contribute to an RRSP depends on your work income. Any money you earn in the RRSP is usually exempt from tax while it remains in the plan. However, you generally have to pay tax when you cash in, make withdrawals, or receive payments. Like other savings plans, RRSPs can hold a variety of investments including stocks, bonds, mutual funds, GICs, ETFs and more. Your investment advisor can tell you which products they offer that can be held in an RRSP.
You can also borrow from your RRSP to buy your first home or pay for your education. You can take out up to $35,000 for a down payment for your first home under the Home Buyers’ Plan (HBP). You can also take out up to $20,000 to pay education costs for you or your spouse under the Lifelong Learning Plan (LLP). You won’t pay any tax on these withdrawals as long as you pay the money back within the specified time periods.
In the year you turn 71 years old, you have to choose one of the following options for your RRSPs:
- Lump-sum withdrawal. This withdrawal would be subject to withholding tax and must be included in income when you file your taxes.
- Transfer them to a RRIF.
- Use them to purchase an annuity.
The TFSA is a way for individuals who are 18 years of age or older to set money aside tax-free throughout their lifetime.
Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn. You can save tax free for any goal you want such as a car, home, vacation or your retirement. If you take money out, you can re-contribute it the following year, in addition to the annual maximum.
Administrative or other fees in relation to a TFSA and any interest on money borrowed to contribute to a TFSA are not tax-deductible.
The maximum amount that you can contribute to your TFSA is limited by your TFSA contribution room. It is important to know your contribution room so that you don’t over contribute to your account and receive penalty taxes. All TFSA contributions made during the year, including the replacement or re-contribution of withdrawals made from a TFSA, will count against your contribution room.
A Registered Education Savings Plan (RESP) is an account used to save for college or university education. Parents often invest in RESPs for their children`s education and RESPs have key benefits when saving for a child’s education including government grants and tax deferred growth.. You can open a RESP for a child, yourself or another adult. The federal government adds to your RESP contributions through the Canada Education Savings Grant. Unlike Registered Retirement Savings Plans (RRSPs), you can’t deduct RESP contributions from your taxes. But money earned inside the account is usually exempt from tax until it is withdrawn. An investment advisor can tell you which investments are allowed in an RESP.
A Registered Retirement Income Fund (RRIF) is an account you open when you transfer money from your Registered Retirement Savings Plan. You must convert your RRSPs to a RRIF before the end of the year you turn 71 years old — although you can do so earlier. Your money will continue to grow tax-free as long as it stays in the RRIF. You only pay tax on the withdrawals you make.
While like other savings plans you are able to choose the investments within the account, with a RRIF you are not able to add additional money to the account once your RRSP has been converted to a RRIF. Once your RRIF is set up, you must take out a minimum amount each year. This amount increases as you get older. There is no maximum withdrawal limit.
The First Home Savings Account is a type of registered savings plan for Canadians saving to buy their first home. Canadian residents aged 18 years or older can open an FHSA to save towards the purchase of a home in Canada. The FHSA is designed for first-time home buyers. In order to be considered a first-time home buyer for the FHSA, at the time the you withdraw money for a home purchase, you must have not resided in a home you owned, in the previous four calendar years.
You can save up to $40,000 in an FHSA. You can contribute up to $8,000 per year. Your contribution room carries forward to the next year if it hasn’t all been used. Once you open the FHSA, you can use it for up to 15 years. After that time, it must be closed. If you don’t buy a home, any unused savings in your FHSA may be transferred to an RRSP. It can also be withdrawn as taxable income.
A Registered Disability Savings Plan (RDSP) allows people with disabilities who are eligible for the Disability Tax Credit and their families to save for their future. The beneficiary of the plan must be eligible for the Disability Tax Credit. Government grants add to your savings and your investments grow tax-free. Contributions to an RDSP are not tax deductible and can be made until the end of the year in which the beneficiary turns 59.
There is no annual contribution limit for an RDSP but there is a lifetime contribution limit. These savings plans typically hold Canada disability savings grants and bonds, which are only available to disabled persons, as well as other investment products. It’s a good idea to speak with an investment advisor to make sure you understand how the grant and bond could affect your RDSP contributions.
Regular withdrawals from an RDSP must begin by December 31 of the year the beneficiary turns 60. When withdrawing funds, your original contributions will not be taxed, however the grants and income earned on the investments will be.