Not all financial products offer the same benefits and level of risk. Some are more likely to match your investor profile than others.
When investing in the stock market, you need to understand the financial products into which you invest your money. In fact, not all financial products offer the same benefits and level of risk. Some are more likely to match your investor profile than others.
What is a stock?
Owning stock means that you own a share in a company. The more shares you own, the larger your share of the business. You are therefore one of the many owners of a company, and as a result, you have a right to the company’s assets and profits. This means that you sometimes have a right to a share of the company's profits as well as pro-rata voting rights in proportion to the amount of shares you hold in the company.
It should be noted that a stock at a high price does not mean that the company’s market capitalization is high.
Here’s an example: At the time of writing this, Google's stock is worth $1197.25 and Apple's is worth $180.91. So, Apple's stock is “cheaper” than Google's, but Apple's market capitalization is higher. In fact, the number of shares issued by Apple is higher than that of Google. In order to calculate Apple's market capitalization, multiply the value of the stock by the number of shares.
Therefore, it is important to keep in mind that the price of a share, in itself, doesn’t mean much. To determine whether share is expensive or not, you must rely on ratios that indicate the company’s financial results as a whole, such as the price-earnings ratio, for example.
What is a bond?
Large companies sometimes need to borrow huge sums of money and have no interest in relying on the banks. In this case, they opt to have bonds issued. Buying a bond is like lending money to a company or government in exchange for interest. They are called coupons. The riskier the business, the higher the interest owed to its creditors.
What is an ETF?
An Exchange Traded Fund (ETF) is a transferable security that trades on the stock exchange. This fund may consist of several securities such as stocks, bonds or other assets. Buying an ETF makes it easy to diversify your portfolio. You can buy ETF units through your financial advisor or through an online broker such as National Bank Direct Brokerage or Questrade. An ETF is a very good tool to start investing in the stock market. It has several advantages: simplicity; liquidity; reduced fees, and diversification.
What is a mutual fund?
A mutual fund is similar to an ETF, with a few exceptions.
Unlike ETFs, whose prices vary in real time like stocks (since they are traded on the stock exchange), mutual fund prices are set once a day. Only the value of the closing price determines the net asset value of the fund. Financial advisors usually distribute mutual funds, and they generally have higher management fees, since a portion of these fees is used to pay commissions to the financial advisers who recommend them. This pays for the management of the fund, as well as for the services of the financial adviser who recommends it.
What is a labour-sponsored investment fund?
A labour-sponsored investment fund is one that injects capital into local small and medium-sized businesses. One of the advantages of investing in a worker's fund is the tax credit. Combined, the federal and Quebec provincial tax credits are 30%. For a $1000 investment, the governments will pay you $300.
Another benefit of a labour-sponsored fund is the possibility of getting tax reductions. For example, you can invest in a labour-sponsored fund through an RRSP account. In this case, you are eligible for this type of fund’s benefits as well as those of the RRSP.
However, when you invest in a worker's fund through an RRSP, it is binding when it comes to withdrawing the money you have deposited. In fact, you can only withdraw the sums deposited if you are retired, for a Home Buyers' Plan (HBP) or a Lifelong Learning Plan (LLP).
What is a segregated fund?
Investing in a segregated fund ensures that you do not lose any of the money you invest in it. It is therefore an insurance product, but is in many ways similar to a mutual fund.
It usually has some form of protection in case of your death and a guarantee that protects some of the money you invest.
Depending on the fund chosen, if you die before a specific date or if the value of your fund is less than the initial capital, you or your heirs should be able to recover some or all of the difference.
Segregated funds have benefits, but investors do not get them for free. Not surprisingly, an investor can expect to pay more for this type of product than for mutual funds or exchange-traded funds.