Your Biweekly Challenge: Investing the Monies (Part 3)

Alright, so hopefully you read the last money column and now you know what kind of accounts are available and the benefits that are offered from those accounts. Let’s talk about saving/investing techniques. At this point we’ve probably all heard about that one guy that made millions from investing in Apple before the boom of the iPod, or the guy that invested in Google when its stock price was less than a hundred dollars a share. You also probably heard about everyone who lost a significant amount of money when the markets crashed in 2008. Now stocks may not be the best option for you, but hopefully by the end of this article you’ll know what your options are.

Stocks

A stock means you officially own a chunk (usually an infinitely small one) of a company. This basically entitles you to a proportion of the corporation’s assets as well as their earnings. These are also known as “shares” or “equity” and are bought and sold on the market. The value of the stock varies day-to-day depending on whether people are interested in buying shares or selling them. There are two ways of making money from stocks: firstly you can just benefit from the dividends (money paid to you on a regular basis from the profits of the company) or secondly, you can earn money from buying stocks at low prices and selling them for higher ones. The second is more difficult because you have to be able to predict which stocks will become more valuable over time and you also have to realise that your stock could lose value at any time. If you want to be super risky, look up stock options.

Pros:

• If you do this well, investing directly into stocks can result in high returns.

Cons:

• It’s been proven over and over again that shares are highly volatile and the markets seem to burst every couple of years. Your odds are better than winning at the lottery but you could still easily lose every penny.
• There are brokerage fees which you have to pay to your bank each time you decide to buy or sell a stock.

GICS

In terms of security there’s probably nothing better than Guaranteed Investment Certificates. To buy these you have to invest your money for a fixed period of time (a “term” can be anywhere from 1 to 10 years) and at the end of that period of time you’re guaranteed to get your money back and the interest you were promised. Cashable GICs also exist where you can redeem your money anytime but the return rates on these usually aren’t as good. (To be frank: they suck.)

Pros:

• Security: At the end of the term, you’re sure of getting the money you were promised.
• You can invest from as little as $500 (invest more and you usually get higher return rates)

Cons:

• You’re basically locking up your money for a fixed period of time and if you try to get it back earlier, you have to pay a penalty. Don’t invest money in a GIC if you think you might need it before the end of the term.
• The return rates for GICs usually are not very high.

Bonds

You lend money to organization (government or other) and they promise to give you back your money and a fixed interest rate. There’s usually a fixed period of time involved and like GICs you have to pay a penalty if you remove the money early.

Pros:

• Usually these are very safe especially if you’re buying government bonds; however, with recent events in Greece one has to wonder.

Cons:

• Usually don’t have very high return rates.

Mutual Funds

These are a set of stocks held and professionally managed by people who (in theory) know what they’re doing. These people take the money of everyone who invests in their fund, pool it all together and then invest it in stocks, bonds, etc. The gains (or losses) are then redistributed across the investors. Some of these focus on more specialised areas whereas others invest all across the market. Some mutual funds will give you dividends, depending on who they invest in.

Pros:

• No matter how little money you invest, it’s immediately diversified across a myriad of investments which means that, hopefully, they won’t all crash at once and leave you penniless.
• The people who manage these funds know what they’re doing. It’s their job to look at the market and analyse it, that saves you the trouble of having to do it yourself.
• Some funds will guarantee a certain return on your investment if you invest enough and for a long enough period of time.

Cons:

• You sometimes have to pay fees called Management Expense Ratio (MERS), or an equivalent charge with a different name. Someone else is doing the work of choosing where to invest your money because you’re basically paying them to do so and they are constantly buying and selling. Less return on your investment.
• If you’re a control freak, this might not be the best option since you won’t be the one calling the shots on where your money goes. This might be a pro if you’re the type to panic each time the markets flop though.
• You might still lose all your monies. No gain guaranteed either.

Side Note: Some banks have GIC mutual funds. These are GICs which invest in mutual funds. It’s kind of the best and the worst of both, guaranteed fixed revenue (even if the mutual fund does better or worse) however you still have to invest your money for a fixed period of time.

Exchange Traded Funds

These are just a fixed group of stocks which are traded as a group. They are mostly like mutual funds except they’re traded on the market AND they come without the hefty fees. They’re kind of a mix of ordinary stocks and mutual funds.

Pros:

• Diversification; like mutual funds you’re not just buying a single stock.
• These are traded on the market, so you buy them and sell them as you like.
• No expensive fees to pay to the people who manage these because no one manages them!

Cons:

• You still have to pay high trading commissions all those other wonderful fees each time you buy.
• You usually want to invest a greater amount of money (think $10k-ish)

Interest Accounts

This is basically the interest you get from your savings account. If you want to be lazy these are usually almost as good as GICs. If you get nothing else from this article GO CHECK YOUR INTEREST RATES on whatever your current savings account is. If it’s less than 1%, go shop around for a savings account which will give you better interest. There’s entire websites dedicated to comparing interest rates and fees for savings accounts so you really have no excuse. You might actually be losing value in your current savings account if your interest rate is lower than inflation.

There you have it folks, these are most of your investment options. Before you jump the gun and start investing, remember to do your research! This is only an introduction and you want to make sure you know about all the sneaky little fees, the expected returns and the security of everything you decide to invest in. Higher returns usually involve higher risks so make sure you know what you’re getting yourself into. Keeping a balance in your portfolio (all the things you invest in) is usually the best way to maintain a steady growth while not risking all of your money.