Types of InvestmentsTypes of Investments

Stock: Stock refers to shares Stock: Stock refers to shares in a company. An individual in a company. An individual can purchase stocks of a can purchase stocks of a company as a form of company as a form of investment.investment.

The person then owns a small The person then owns a small percentage of the financial percentage of the financial well-being of the company.well-being of the company.

A person who does this is A person who does this is essentially predicting that essentially predicting that the company will do well the company will do well financially, so that the value financially, so that the value of the stock will rise.of the stock will rise.

However, if the value of the However, if the value of the company decreases, so company decreases, so does the value of the stock.does the value of the stock.

Two different types of Two different types of stocks include blue-chip stocks include blue-chip stocks and speculative stocks and speculative stocks.stocks.

Blue-chip stocks – typically Blue-chip stocks – typically conservative, these are conservative, these are stocks in companies that stocks in companies that have a steady history of have a steady history of steady earnings.steady earnings.

Speculative stocks – these Speculative stocks – these stocks, on the other hand, stocks, on the other hand, have the potential to vary have the potential to vary wildly in their future wildly in their future behaviour.behaviour.

One phrase that could be One phrase that could be used to describe these used to describe these stocks is “high risk, high stocks is “high risk, high reward”.reward”.

Bond – A bond is essentially a Bond – A bond is essentially a promise by one party to pay promise by one party to pay another party a guaranteed another party a guaranteed amount after a certain length amount after a certain length of time in return for lending of time in return for lending money now.money now.

For example, one party may For example, one party may borrow $1000 from another borrow $1000 from another party based on a promise to party based on a promise to pay the first party $1050 in pay the first party $1050 in one year’s time.one year’s time.

Governments frequently Governments frequently issue bonds as a means of issue bonds as a means of raising money.raising money.

Guaranteed Investment Guaranteed Investment Certificate – is similar to a Certificate – is similar to a bond and is issued by the bond and is issued by the Canadian government.Canadian government.

For instance, suppose that For instance, suppose that Jenny goes to her bank and Jenny goes to her bank and purchases a GIC.purchases a GIC.

Imagine that the terms of Imagine that the terms of the GIC are as follows:the GIC are as follows:–Purchase price of $1000Purchase price of $1000–Ten year termTen year term–4.4%/a compounded semi-4.4%/a compounded semi-

annuallyannually

Jenny is pleased because in Jenny is pleased because in ten years she will be able to ten years she will be able to cash in her GIC for the cash in her GIC for the following amount:following amount:

Calculations …Calculations …

The government is pleased The government is pleased because it gets $1000 to because it gets $1000 to use as it sees fit for the next use as it sees fit for the next ten years. ten years.

It will likely invest this It will likely invest this money in the hopes of money in the hopes of raising more money that raising more money that what it paid back to Jenny.what it paid back to Jenny.

Jenny is pleased because Jenny is pleased because she is guaranteed to have she is guaranteed to have $1545.32 in ten years.$1545.32 in ten years.

However, a risk to Jenny is However, a risk to Jenny is that she cannot cash the that she cannot cash the GIC in before ten years (i.e., GIC in before ten years (i.e., before the date of maturity) before the date of maturity) or else she will have to pay or else she will have to pay a penalty.a penalty.

Mutual Fund – a mutual Mutual Fund – a mutual fund is a type of investment fund is a type of investment where people pool their where people pool their money together to buy money together to buy stocks, bonds and other stocks, bonds and other assets.assets.

A mutual fund is managed A mutual fund is managed by an investment company by an investment company that charges a fee.that charges a fee.

Registered Education Registered Education Savings Plan – an Savings Plan – an investment set up to save investment set up to save for a child’s education. The for a child’s education. The income from the plan grows income from the plan grows tax-free.tax-free.