Investing Basics

Common Investment Instruments

Stocks

Stocks are also called shares or equity because they are a very small piece of ownership in a company. Stock prices vary depending on the company’s success and future perceived earnings. If you own a stock you are considered a shareholder and would have certain rights such as voting at the company’s annual board meetings. When a corporation goes public, it is giving up some public ownership for a stake in the corporation. Once these shares are issued, any purchase or selling of shares is done through a market by connecting a buyer and a seller. For every buyer there is a seller, therefore, the corporation itself doe not directly gain any money when people buy and sell stock in a company.

Bonds

Bonds are loans you give to a government or corporation who is the issuer in exchange for scheduled interest payments and the promise of getting your principal back on a maturity date. Bonds can have varying lengths that can be as long as 40 years. Bonds are traded like stocks. Bond holders do not own any equity in the corporation however, in the case of bankruptcy, bond holders would be paid before any stock holders would receive money. Depending on the credit worthiness of the issuer you would receive different interest payments with higher interest payments earned for less credit worthy issuers.

 

Mutual Funds

These are pooled funds gathered from individual investors. Fund manager(s) use pooled funds to buy underlying investments (stocks, bonds) according to a specific mandate. The number of holdings in a mutual fund typically range from as little as 30 to more than 500 holdings. Mutual funds typically have a baked in management fee of anywhere from 1.5 to 2.5% which could be very costly as your investments grow. Mutual funds are typically purchased through a bank branch, fund company or wealth management company. This is usually the default manner in which you are invested if you walk into a bank or credit union.

Exchange Traded Funds (ETF)

Similar to mutual funds in that they have many holdings but they are traded on an exchange so you buy and sell the ETF as you would an individual stock. ETFs can be either passively or actively managed with passive ETF being more common due to their much lower fees (less than 0.3%). Actively managed ETFs may have management fees up to 1.0%. Both active and passive ETFs usually follow some sort of index or customized index with the underlying holdings are typically pre-determined based on the company’s market size

 

Understanding Account Types

Accounts can be thought of as being registered (tax sheltered) or non-registered. All registered accounts have some kind of tax shelter benefit while non-registered accounts do not. However, the types of accounts don’t determine what type of investment (asset) you actually hold. If you think of account type as a bag, the difference is how the assets taxed when either while they are in or when they are removed from the bag.

Registered Accounts:

  • Registered RetirementSavings Plan (RRSP): contributions into an RRSP are tax deductible and the investments within an RRSP grows tax free while in the bag. Any amount removed from the bag is taxed as if it is income earned in that year regardless if the investments went up or down.
  • Tax Free Savings Account (TFSA): contributions into a TFSA are after tax contributions. Growth within a TFSA (with the exception of foreign dividends) are not taxed. Money can be withdrawn from a TFSA at anytime without tax consequences. If a withdrawal is made, you will receive that TFSA contribution room back equivalent to what you withdrew the following calendar year.
  • Registered Retirement Income Fund (RRIF): this is what an RRSP gets converted to when you turn 71 years of age. Once you have a RRIF you are required to withdraw a minimum percentage of your total RRIF each calendar year. Withdrawals are treated the same way as an RRSP.
  • Registered Education Savings Plan (RESP): A savings plan to support children for post-secondary education. Based on contributions by parent(s)/ grandparent(s) into an RESP, there are incentives for the government to give up to a total of $7,200 per child in contributions. The investments grown within an RESP tax free but withdrawals for the growth portion are taxed according to the student’s tax bracket.
  • First Home Savings Account (FHSA): Contributions are tax deductible and grow tax free. FHSA must be used within 15 years of opening for a first home purchase.

Non-Registered Account:

Regular investment accounts without tax shelter benefits

All accounts can hold the same investment types such as: Cash, GICs/term deposits, stocks, bonds, mutual funds, segregated funds, etc.

 

Understanding Value Aligned Funds

There are many different names to designate a value aligned fund. Here are common names:

  • Environmental, Social, Governance (ESG)
  • Socially Responsible Investing (SRI)
  • Ethical Funds
  • Sustainable/Sustainability Fund
  • Impact Fund
  • Gender equity/ Women’s Leadership Fund
  • Clean Energy
  • Green Fund

You should know that there are 2 common ways that funds address value alignment:

Positive Screening

This requires a minimum bar for the company to be included in a fund. It may include “best in class” which includes what the fund manager deems as the most ethical company from that sector. In this fashion a Green Fund that only uses positive screening can include oil and gas companies that the fund manager believes are environmental leaders in that sector. It can be a very low bar and you may be invested in some harmful sectors if this is the only approach used.

Negative Screening

This filters out companies that engage in a certain activity. There may be a minimum threshold (i.e. a company generates more than 10% of its revenues from weapons). Some common negative screens include tobacco, gambling, fossil fuels and weapons. However, many large corporations that are involved in many different business practices (i.e. Amazon, Alphabet, Microsoft, Meta) may be included as their involvement in the weapons sector while significant may not be their core business activity.

IMPORTANT

THERE ARE NO STANDARDS WHEN IT COMES TO VALUE ALIGNED FUNDS! THESE LABELS ARE USED AT THE DISCRETION OF THE BANK/FUND COMPANY BASED ON WHAT THEY BELIEVE TO BE VALUE ALIGNED. YOU WILL WANT TO DIG DEEPER BECAUSE MANY PEOPLE WHO HOLD VALUE ALIGNED FUNDS ARE SHOCKED TO LEARN THAT THERE ARE SEVERAL HOLDINGS THAT CONTRADICT THEIR VALUES AND THE PERCEIVED LABEL OF THE FUND.