There are many types of investments. If you are considering investing in stocks, bonds or any other investment products, you’ll want to understand how they work.
On this page you’ll find
What are the types of asset classes?
There are many types of asset classes. Each asset class puts your money to work in a different way, provides different returns and exposes you to different levels of risk.
Investments generally fit into three main asset classes:
- Cash equivalent investments – Includes money market funds, guaranteed investment certificates (GICs), and treasury bills. They are low-risk and therefore offer low-rate interest. This type of investment guarantees both the amount you invest and your interest.
- Fixed income investments – Includes corporate or government bonds maturing in more than one year, preferred stock, and certificates of deposit. They pay a fixed interest and, in some cases, may go up or down in price.
- Equities – Includes shares of stock in an individual company or shares in a mutual fund or exchange-traded fund (ETF) that owns stock in a number of companies. They may pay dividends and may go up or down in price.
There are also alternative investments including crypto assets, real estate, and exempt securities, that don’t fit into one of the three asset classes above.
One way to have a diversified portfolio is to ensure you have investments from more than one type of asset class. Some types of investments, such as mutual funds or ETFs, may collect multiple types of investments into a single fund.
Bonds
Bonds are a type of fixed-income investment. They are a way of lending your money in return for a certain rate of interest. Bonds can be issued by companies or the government (the issuer), for a set period of time (the term). The term can be anywhere from less than one year to as long as 30 years.
On the date the bond becomes due (the maturity date), the issuer is supposed to pay back the face value of the bond in full.
You can make money on bonds by holding the bond until the maturity date and claiming the interest, or by selling a bond for more than you paid. You can lose money on bonds if you sell the bond for less than you paid.
Find out more about how bonds work, the types of bonds, and how to buy and sell bonds.
Stocks
Stocks are a type of security that give you part ownership in a company. They are also referred to as equities. When you buy stocks, you are buying a share of the company that issued them.
The majority of stocks are common stocks, which are a type of equity investment. Common stock offers the potential for growth through rising share prices and dividends. Common shareholders are generally entitled to dividend payments and voting rights at shareholder meetings.
Preferred stock is a type of fixed income investment. It offers regular income through fixed dividends and potential for growth through rising share prices. Preferred stock normally doesn’t come with voting rights.
You can make money on stocks by selling at a higher value than what you paid, or by receiving dividends paid by the company. You can lose money on stocks if you sell at a lower value than what you paid. There are many factors that can affect stock prices.
There are many factors that can affect stock prices. Learn more about where and how stocks are traded.
Mutual funds
A mutual fund is a collection of investments, such as stocks, bonds, or other funds, owned by a group of investors and managed by a professional money manager. The composition of the fund is guided by its investment objective. When you buy a mutual fund, you are pooling your money with other investors.
Most mutual funds are sold through financial advisors who are required to be registered with their provincial regulator (for example, the Ontario Securities Commission). Learn more about how mutual funds work.
Exchange-Traded Funds (ETFs)
An ETF is an investment fund that holds a collection of investments, such as stocks or bonds. ETFs are managed by professional money managers and traded on a stock exchange. Most ETFs are designed to track an index, such as the S&P 500 or S&P/TSX 60. This means that you would be investing in a large number of securities at once, rather than choosing specific companies.
Some investors choose ETFs to diversify their portfolio and to apply a passive investing strategy. Passive investing strategies typically aim to match the performance of the market, rather than try to beat it. Because most ETFs publish their holdings each day, investors can easily find out the current market price and holdings of an ETF before buying.
Mutual funds and ETFs share some similar attributes. They both hold a collection of investments, which can help reduce portfolio risk through diversification. Both have potential for return and for risk. There are also some differences between ETFs and mutual funds, including fees.
Guaranteed Investment Certificates (GICs)
A GIC is an investment that works like a special kind of deposit. When you buy a GIC, you are guaranteed to get the amount you deposited back at the end of the term. For this reason, GICs are considered one of the safest ways to invest.
Most GICs pay a fixed rate of interest for a set term. When the term ends, you receive the amount you paid plus the interest. Usually the longer the term is, the higher the interest rate you will receive. You may get paid interest monthly, at the maturity date, or at some frequency in between.
If you choose a GIC you will have the comfort of knowing how much your investment will go up by the end of its term. This may or may not be higher than the rate of return on other types of investments, whose value fluctuates with the stock market.
GICs are a type of investment that can be useful for short-term investing goals. Many GICs are offered for terms of five years or less. Learn more about GICs.
Annuities
Annuities are most commonly used to generate retirement income. An annuity is a contract with a life insurance company. You deposit a lump sum of money, and they agree to pay you a guaranteed income for a set period of time, or for the rest of your life.
You can buy an annuity from a licensed insurance agent or broker, online from a broker or insurance company, or from a licensed financial advisor. Annuities can be purchased using income from an RRSP, a RRIF, or a non-registered account. Once you purchase an annuity, you can’t make changes to it – your regular payment amounts are locked in.
Real estate
Buying a home is a common way to invest money. It provides a place to live and may gain value over time if housing prices increase. Others may invest in real estate in order to hopefully re-sell at a higher price later, or by purchasing multiple properties to then lease out and gain the rental income.
Investing in property is more of a hands-on way of investing compared to traditional investments. It involves many different types of transactions including mortgages, maintenance costs and property repairs, taxes, and more.
Another way to invest in real estate is through real estate investment trusts (REITs). REITs are companies that own multiple properties such as offices, warehouses, shopping malls, or apartment buildings. There are also Mortgage Investment Entities (MIEs), which pool money from investors to lend to people as mortgages. REITs and MIEs are generally considered riskier investments as they are sold in the exempt market rather than being listed on an exchange.
Real estate investments can play a role in diversifying an investment portfolio. However, like any investment, there are risks associated with real estate. Real estate prices can fluctuate along with the economy and interest rates, as well as location and the housing market.
Real estate is not the only type of investment that is affected by changes in interest rates. When the overnight rate changes, this tends to have a ripple effect on the economy. Learn more about how interest rates affect your investments.
Crypto assets
Crypto assets are digital assets that are traded on online platforms. The most common crypto asset is cryptocurrency. It is intended to work like a digital currency and allows its owners to buy or sell goods or services. It can also be saved and exchanged later. Many investors hold cryptocurrencies in the hope it will increase in value.
Unlike traditional currencies, cryptocurrencies are not issued or backed by a government or central bank. Crypto assets are distributed through a digital ledger system called a blockchain. The blockchain is distributed through a network of computers and manages the chain of custody of the crypto asset. Crypto asset prices can be very volatile and increase or decrease many times during the day. In addition to being volatile, crypto assets can be vulnerable to fraud, manipulation and cyber attacks. If you are thinking of buying crypto assets always use a registered crypto trading platform.
Learn more about crypto asset terms, trading, rules and regulations, and frauds.
Exempt securities
The “exempt market” describes a section of Canada’s capital markets where securities can be sold without the protections associated with a prospectus. Generally, securities offered to the public in Ontario must be offered with a prospectus, which provides detailed information about the security and the company offering it.
Investments such as debt, equity, asset-back securities, investment funds, and derivatives can be sold in the exempt market.
Investing in the exempt market offers investors an opportunity to participate in early stage companies with innovative products that are not large enough to be a public company. It also provides another option to diversify a portfolio.
Exempt securities also come with risks. These risks include:
- Risk of loss
- Lack of information, compared to a publicly traded company
- Locked-in investments that may not be able to be sold quickly or at all.
Learn more about exempt securities and prospectus exemptions.
Summary
If you’re thinking about investing, it’s a good idea to learn the differences between various types of investments.
- There are three main asset classes: Cash equivalents, fixed income, and equity investments.
- GICs are a type of cash-equivalent investment.
- Fixed income investments include bonds, and preferred stock.
- Equity investments include shares of stock in a company or shares in a mutual fund or ETF that owns stock in a number of companies.
- Alternative investments including crypto assets, real estate, and exempt securities.
