Ever consider investing? Do you have investments? Do you know what happens to your money, such as a retirement savings plan, when it is invested? Here are some common products where your money is invested.
A bond is a contract where a company or government borrows money from individuals with the intent of repaying it, in addition to a predetermined interest rate at a predetermined time. Bonds are generally very safe investment options because the return of the principal, the borrowed money, is guaranteed, unless the government or company is bankrupt.
A stock is a share of a company, hence a stock holder is a part owner of the company. Stocks are traded on exchanges globally so their value fluctuates; they are associated with varying degree of risk. Some corporations pay dividends, a percentage of profits, to stock holders per share. Stocks are also referred to as equities.
A GIC is a guaranteed investment certificate. A GIC is risk less because the return of the principal is guaranteed. Some GICs may even guarantee a rate of return. In a GIC, money is invested for a specified period of time, such as 1 month or 5 years, and at the end of the term, the initial investment is returned along with any profits on the savings. GICs that guarantee a specified rate of return also repay that set amount at maturity.
A mutual fund is a collection of stocks, bonds and other assets that are chosen and managed by a mutual fund manager. The mutual fund has a fee called a MER, management expense ratio. The MER can be as low as 1.2% or higher than 4 %; the easier the mutual fund is to manage, the lower its MER. The lowest risk mutual funds are composed entirely of bonds, however their growth potential is very low. The highest risk mutual funds are composed entirely of equities, hence their growth potential is very high. A mutual fund composed of 50% bonds and 50% equities offers a moderate amount of growth and exposes the portfolio to a moderate amount of risk.