Investment Basics
39 Types of Investments
Anne Lee
There are many types of investments that one can put funds towards. It will be discussed some of the most common investment types. Please note that the level of risk with each investment varies.
Tax Tip: Cash Transferred to Investment Account
It is common for individuals to transfer cash from one’s chequing account, and into either a tax-advantaged account or an investment brokerage account. But without actually making an investment into an income-producing asset, the funds are no better than when they were sitting in an individual’s chequing account by being devalued with inflation. It is important to actually go past putting funds into an investment account, but actually make an investment.
High Interest Savings Account
- This account usually offers a much higher interest rate than what may be available in a regular chequing or savings account. Usually, there are not as many daily financial transactions in this type of account so financial institutions can offer a higher rate of return. High interest savings accounts are recommended avenue for money allotted to emergency funds. One will be able to have quick access to the funds, as the funds remain very liquid but also be able to obtain a higher rate of return than the average bank account. High interest savings accounts are considered very low risk.
Guaranteed Investment Certificates (GICs)/ Term Deposits
These investments are considered secured investments, meaning that you get back the amount that you invest in at the end of the agreed upon term. GICs and term deposits can be held in a variety of investment plans. At the beginning of the term, an agreement would be entered in which the financial institution is required to provide you the parameters such as the term of the product, how and when the principal is to be repaid, what the interest rate is and how it is calculated if variable interest rate. As both the principal and interest payments are guaranteed, this type of investment is very low risk. The main difference between GICs and term deposits is the length of the term, term deposits generally have a shorter term than GICs but also a lower rate of return of interest. GICs and term deposits for situations where you may need funds in the shorter time frame. Common circumstances may be that you are saving for a down payment to purchase a house in the next year, or for a child’s post-secondary education which is within a few years.
Tax Tip: Interest Income in Taxable Account
Even though interest income earned from high-interest savings accounts or GICs is guaranteed, if the investment is in a taxable account then the earned income will be subject to full taxation marginal tax rates. This income is considered interest income, which is taxed at the same rates as employment income from one’s job. Please consider the after-tax net proceeds you will have in your assessment of these assets.
Stocks
Stocks are a type of security that represents a share of ownership in a Company. Increased stock in a company that one owns generally has more ownership stake in a Company.
Bonds
Bonds work in where an individual (also considered the lender) makes a loan to a corporation or government. In return, the lender would collect interest for providing the cash that a Company needs. When interest rates fall, the value of a bond tends to increase.
Mutual Funds
Mutual funds are a very popular investment tool. It is mainstream for pension plans to invest in a variety of mutual funds as part of its investment portfolio. A mutual fund would pool funds from a number of investors to make investments in different stocks, bonds, and other securities. Mutual funds are managed by a fund manager, who would make investment decisions on your behalf.
