My financial chronicle
Investment categories you say?
Financial markets are complex. And it's very easy to get lost in all the financial mumbo jumbo. What are the main investment categories and what do I need to know about them?
When you're talking investments, the first thing to do is identify the two main categories: guaranteed investments and non-guaranteed investments. They're two different worlds. Here is a comprehensive list of the guaranteed investments found in Canada: guaranteed investment certificates (also known as GICs), savings bonds, and Treasury bills. That's all. These are the only investments where the money you invest is guaranteed at all times. The capital is guaranteed, but the return may or may not be. All other investments involve some form of risk.
This brings us to the world of non-guaranteed investments. Basically, there are two major categories: marketable bonds (be careful, these are not savings bonds) and stocks. These two categories include a variety of products, some of which can be simple like investment funds, and others more complicated like derivatives. But let's get back to the two main categories…
Marketable bonds (municipal, provincial, federal, or corporate) are debt instruments. When you buy them, you become a creditor of the entity issuing them, i.e., the government or a company. The issuer owes you money and undertakes to reimburse you the full value upon maturity–in one, three, five, ten, twenty, or thirty years–and to pay out interest in the meantime. But during this time, the market value of your bond will fluctuate according to interest rates. Its value will increase if market interest rates drop since your bonds will be worth more than newly issued bonds. But the reverse is also true.
Their value is guaranteed at maturity, but it will definitely fluctuate along the way. And the value at maturity will depend on that of the issuer, which can go under in the meantime, particularly if it is a company. When that happens, your bond could end up not being worth the paper it's printed on!
Stocks are a completely different type of investment. They are titles of ownership. When you buy stock, usually in stock markets, it's as if you became part owner of the company issuing the stock. Stocks involve a higher risk than marketable bonds because their value is directly related to that of the company itself, and to demand for them on the market. The more popular the company is, the more its value will increase, and vice versa. Sometimes even high-priced stocks can lose nearly all of their value (Bre-X, Nortel, etc.). Your profit or loss corresponds to the difference between the price you paid to purchase the stock and its price when you sell it. Unfortunately, with stock, you're never totally protected from any misfortune the issuing company may encounter.
The secret to a good investment portfolio is to have just the right proportion of guaranteed investments, marketable bonds, and stock. It's easy. Talk about it with your financial security advisor, your greatest ally for developing a winning strategy!