Investing 101: your questions answered
By ATB Financial 25 February 2020 8 min read
When it comes to investing, people have questions that just aren’t getting answered. Questions they’re embarrassed of. Questions they may be afraid to ask. Questions like, “What is investing, anyway?”
Investing may seem like a mysterious and intimidating concept right now. And that’s ok. By the time you’re finished reading this article, you’ll be equipped to make more informed choices about how investing might fit into your life and help you to meet your financial goals.
How does investing work?
Most people know that when you invest money, that money earns money. But why?
With some investments, such as GICs, you’re essentially loaning money to a financial institution, government or corporation. The organization you’ve invested with pays you interest—kind of like a fee for the use of your funds.
With other investments, such as stocks, you are buying part of a company or asset. The changing value of your share reflects the changing value of the company or asset. As a shareholder, you may also be entitled to a portion of profits earned.
If you own a mutual fund, this represents a collection of investments that all have different ways of increasing in value, whether that means interest earned from a bond, or growth in a stock from an evolving company. These earnings are pooled and distributed to investors.
What’s the difference between saving and investing?
If you have a savings account that earns interest, you may think you’re already investing. But the truth is that interest rates on many savings accounts are so low that the most you can hope for is to offset the effects of inflation on your account balance. Over time, inflation increases the prices of things you want to buy. If your money isn't increasing in value at the same rate as prices are going up, the money you have today will not go as far toward buying the more expensive things of the future.
Often when people talk about saving—for retirement, higher education, a down payment on a mortgage, whatever their goal is—they could be talking about investing. Why put your money into a savings account when you could put it into an investment that will earn you more money in the meantime?
Savings accounts do serve a purpose, especially if you need your money to be immediately accessible, as in the case of an emergency fund.
Investing jargon is confusing. Where can I find clear definitions of these unfamiliar terms?
How do RRSPs (and other registered government savings programs) fit in?
Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), Registered Education Savings Plans (RESPs), and Registered Disability Savings Plans (RDSPs) are all government-sponsored investment programs that offer tax benefits and/or matched contributions for certain invested amounts.
Remember: these investment programs are not investments themselves—they serve as containers or accounts that you put investments into in order to benefit from tax deductions and/or government grants.
A non-registered account implies that all of the growth within the account is taxable, and that government grants do not apply. This is why it is appropriate to take advantage of government registered programs first. For example, a regular savings account that is not an RRSP or TFSA is a non-registered account and is fully taxable.
For more information, check out our comparison of RRSPs and TFSAs, or watch this video:
How do I know if I’m ready to invest?
- How well do you understand your current financial situation?
- Do you have an emergency fund?
- Do you have debt?
Don’t I need a lot of money before I start investing?
Nope! Many investments have a minimum initial contribution as low as $100. Remember, anyone who has developed wealth through investing had to start somewhere—the important thing is that they got started! When it comes to investing, making consistent small contributions is a more effective strategy than waiting to invest hundreds or thousands of dollars at a time.
Isn’t investing a pretty risky way to manage my money?
One common misconception about investing is that it’s always very risky. In reality, you can choose from a whole range of investments and risk levels.
Depending on the amount of money you have and the length of time you’re talking about, it can be more risky not to invest your money, since the effects of inflation can cause your money to depreciate if you leave it in a savings account (or stashed under a mattress).
How do I set realistic investing goals?
Before you can set a realistic investing goal, you need to know what you want to do (for example, save $20,000 to spend six months in the Philippines), when you want to do it (for example, five years from now), how much you can afford to contribute to investments, your risk tolerance, and what the earning potential of your chosen investments is.
Sound like a lot to process? A financial advisor or online investing program can help you assemble this information, make sense of it, and adjust your goals and investing decisions accordingly.
What types of investments are available to me?
Though many people think about “stocks and bonds” when they think about investing, there are many different types of investments. Here’s a quick rundown on the most common ones:
Guaranteed Investment Certificates (GICs) are investments that offer you a guaranteed return (interest payment) on a one-time contribution at the end of a stated period of time.
Compound Interest Certificates (CICs), like GICs, offer a guaranteed return on your investment; but unlike GICs, CICs earn compound interest (interest on your interest).
Bonds are basically I-owe-yous between a government or corporation and you, the investor. When you purchase a bond, the government or corporation enters into a contract with you to pay back your initial contribution at the end of a stated period of time, and pay you interest in the meantime. While bonds sound similar to GICs, they are a slightly higher-risk form of investing, since they are not guaranteed.
Stocks are ownership shares in a company. They can be bought and sold, and their value fluctuates according to the market value. Individual stocks are some of the highest-risk investments.
Mutual funds are collections of individual securities (like stocks and bonds), managed for a group of investors by an investment expert called a portfolio manager. There are many different types of mutual funds that are appropriate for varying levels of risk tolerance. Taking on more risk can mean larger potential rewards but it can also mean larger periodic declines. Mutual funds are a great way to achieve what’s called diversification, which means investing in different industries, geographical locations and types of securities.
Exchange-traded funds (ETFs) are similar to mutual funds in that they are both pooled funds of investors’ money. Mutual funds have active portfolio managers who consider many facets of the global market to determine an investment strategy for your money within a certain set of expectations and parameters, called a mandate. ETFs, however, typically have a mandate to simply track a broad market index or multiple indices; they do not have anyone making changes based on market trends like active portfolio managers do. This is why they are considered to be a more "passive investment". Some ETFs will see more fluctuations in value than a mutual fund because they follow exactly what the market is doing. In contrast, active mutual fund managers aim to have the investments under their supervision experience less volatility than the market, with the aim of higher returns
While there are different investments you can purchase, the account in which you place those investments will determine how those investments will be taxed. Every investment you purchase will be in a certain type of account, either registered with the government (see the section on RRSPs, above) or non-registered.
Are those do-it-yourself investing apps a good idea?
Do-it-yourself investing is marketed as a way to help you simplify the investing process and make more money by cutting out the middleman. However, unless you know a lot about the stock market and have a financial cushion to absorb potential losses, working with an expert (whether it be digital or in person) to manage your investments is your best bet when it comes to maximizing your returns and minimizing your financial stress.
Once I’ve started investing, how do I manage my investments wisely?
Here at ATB, we like to talk about the six pillars of investing:
- Make a plan, including a well-defined goal.
- Invest early (or as early as you can! Maybe that’s today!)
- Invest regularly, set up automatic contributions into your investing account.
- Diversify (this means to hold investments of different types and in different sectors).
- Review your plan, regularly and make adjustments accordingly.
- Stick to your plan, when you invest with a level of risk that is appropriate for you and your financial goals, you shouldn’t lose sleep or make impulsive changes when your investments fluctuate.
Investing doesn’t need to be scary. In fact it should be exciting because it means you are one step closer to reaching your financial goals.
If you feel like taking the next step and would like some more advice on how to manage your expenses and grow your savings, check out our ATB Prosper quiz where we recommend investment options based on your financial goals, timelines and preferred level of risk.
If you think you need to do a bit more research, make sure to check out our Investing Fundamentals guide where we take a deeper look at risk and volatility, diversification, dollar-cost averaging, rebalancing and compound returns.
ATB Wealth consists of a range of financial services provided by ATB Financial and certain of its subsidiaries. ATB Investment Management Inc., ATB Securities Inc., and ATB Insurance Advisors Inc. are individually licensed users of the registered trade name ATB Wealth. ATB Securities Inc. is a member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada. ATB Prosper is a product of ATB Securities Inc.