Basic information to demystify the subject of investing
Mutual funds, stocks, bonds?
Mutual funds are just investments in stocks, government bonds, corporate bonds and other products that an investment company manages for all it's customers. Mutual fund companies charge fees for this service. Most charge a percentage when you buy or sell plus annual management expenses charged to the fund. No-Load funds do not charge fees for buying or selling. Mutual funds invest in different things depending on the goals of the fund. Some funds go for maximum profit but may purchase risky stocks while others give up profit in favour of stablity from investments like bonds.
Equity mutual funds increase their value by buying shares in companies in certain sectors such as energy or precious metals.
Income funds make money which is paid to investors in the form of more units of the fund. These investments are called liquid assets; they include bonds, mortgages and shares in companies that pay dividends.
Balanced funds are a compromise, a mixture of income and equities and both money-making and stable investments.
Cashable or locked in (TFSA, RRSP, 401k) GIC/term deposit?
Registered Retirement Savings Plans and Tax Free Savings Accounts are accounts registered with the government and allow Canadians to avoid paying taxes on the money earned within the account. The American version of an RRSP is called a 401k. There are rules that limit the amount that can be put in and what taxes are paid when the money is taken out. With a self-directed registered account, you can invest in almost anything that your broker or trust company can hold for you. Mutual funds within registered accounts are the most common but many investors like the guarantee you get with a GIC or term deposit. The longer the time you are willing to lock in your money, the more interest you can make. Some GIC rates are floating but most pay up to the bank's annual prime rate.
Index, index fund, ETF
Major national stock exchanges, such as the Toronto Stock Exchange (TSX) average out the value of their major stocks and report that as the current value often referred to as the index. Many investment companies combine all those stocks into a fund so that the value of that investement is proportionally the same as stock market index. These investment products are then resold as indexed mutual funds or as exchage traded funds (ETF) sold through stock brokers. Sometimes index products are limited to certain sectors such as energy or precious metals. Index ETFs have a much lower management expense fee than regular mutual funds.
The basic idea is "don't put all your eggs in one basket". To be safe from market ups and downs, it is generally adviseable to spread your investments around. This is easy with mutual funds. You can invest in different sectors of the economy such as commodities (natural resources), banking and consumer goods. It also makes sense to invest internationally as well as in Canada. Look for "global" mutual funds to do this.
Dollar cost averaging?
By putting the same amount of money into your mutual funds account every month, you make price fluctuations work in your favour. You get more units when the price goes down and increased account value when the market goes back up. Mutual funds dealers always explain this concept because they make lots of commissions from your monthly investment.
I want to invest but I am worried about the market?
If you got out of the market October 2008 and bought back in in January 2009, you're probably laughing right now. The rest of us have lost 30% or more of our protfolio value and if we resisted panicking and didn't sell, we generally got it all back.
Some analysts advise selling, others advise to ride it out. Here are some questions to consider:
How much more is it going to go down?
If you sold now, would you spot the bottom accurately enough to buy back in at the right time?
Are the stocks that you picked, basically good companies that will rebound with the market?
- How do I know if this the right time to invest?
- So we are entering a major recession. Remember the old adage "Buy low, sell high". Should you buy now or wait a little longer for prices to drop even more
Here are some signs to look for that the economy is turning around:
People are buying houses
Reported unemployment rates are going down
The retail sector, autos, and consumer spending are strong
Companies are investing on equipment and other capital programs
- The smart money is buying in now and ready for the ride back up.
There are a number of traditional approaches that are commonly used to select stocks. If you compare the returns that professional money managers get against the stock market averages (index), you will see that few of them do better just average. If experts with all their knowledge get it wrong, a person with average knowledge should be able to do at least as well. A wise investor uses as much information is available and even a combination of techniques to come to a consensus on the best investments.
Common Sense and a little bit of emotion:
Nobody advocates this as a method itself. Basically, you can't just go by the numbers but you need to do a bit of research and use some common sense in your decision.
Herd mentality: If people are talking about this company, more investors will want to buy in and drive the price up but that may have already artificially inflated its price.
International export market: When our currency is high it makes it less attractive for international buyers.
The next big thing: Does the company have a unique product that is in great demand?
This controversial theory says that if you look at a chart of a stock's performance over time, you can predict how it will perform in the future. Stocks do tend to be cyclical. They also tend to follow trends. Looking at moving averages and volatility are common useful indicators in technical analysis. People who seriously study technical analysis have extensive formulas and terminology used in their forecasting.
Fundamental Analysis, value investing:
Warren Buffet, one of the world's most successful investors gives value investing a lot of credibility and has spawned the most accepted method for evaluating stock purchases. Basically, this method involves determining the true value of a company and calculating an appropriate value for its shares. Companies who's shares are trading for less that their "book" value are good buys.
How to "read the numbers" to evaluate a company
and decide to buy its shares
[Market Capitalization] [Trading Volume] [Price/Earnings Ratio]
[Earnings Per Share] [Yield]
P/E is one of the most commonly quoted indicators.
|share price divided by total earnings per share
Low P/E usually indicates a stock that is considered undervalued.
High P/E generally reflects stock market investors expectation that a
stock will improve.
Earnings Per Share
EPS = total earnings / number of shares
Return On Equity
ROE = %(EPS / company book value)
higher is better, should be > 10%
%(total dividends paid out / total net earnings)
Types of investments
The TSX Group symbol change initiative for shares listed on TSX and TSX Venture
that have non-conventional voting structures was completed on December 13, 2004.
The following types of voting structures now have voting structure identifiers:
NV non-voting shares
MV multiple-voting shares
SV subordinate-voting shares
LV limited-voting shares
RV restricted-voting shares
The complete list of modified symbols is available on ww.tsx.com.
Registered Retirement Savings Plan(RRSP)
Contrary to most common advice for Canadians, some people suggest that sheltering
your money in an RRSP is not necessarily the best idea for investors. You have
to pay taxes and you can either do it now when you are most in control of your
investments or in your senior years when you are trying to live off what you
have saved. People argue that your tax rate is high now and will be lower when
you retire but who knows if this will be true in the future. Successful investors
might have quite a high income in their senior years.
There are other benefits to investing outside of RRSPs. There are capital gains
and dividend income from Canadian companies that can be deducted but not if
the income was sheltered in an RRSP. Similarly for American investments, you
can not use foreign tax credits in an RRSP.
I am interested to hear if other people have wrestled with this question. Investments
not locked into RRSPs can still be used for collateral or personal emergencies.
There are a few benefits I still see for RRSPs such as disciplined investing.
You are less likely to spend money that is locked away in an RRSP. I think I
am leaning toward investing outside an RRSP these days. Has anyone else analysed
You're right but don't expect any financial institutions to put it in their
ads. They are selling RRSP's and mutual funds. They make a lot of money "administering"
I've read that if you have no employer pension then RRSP's under $100,000 or
over $500,000 are worse than no RRSP at all. The first just robs you of low
income benefits and the second is taxed too high, including clawing back your
If you are single and have a medical condition which is likely to shorten your
life then the RRSP will be cashed out when you die up to 65% can go to income
taxes in Ontario (two levels of surtax on "large" incomes) instead
of to your estate. It would be better to have no RRSP at retirement in that
Links to other resources
CBC Stock Charting
Business News Network