7.3.1 Comparing investments
The most important characteristics of an investment for an investor are its return, risk and liquidity (described in more detail in the section titled About investments). The chart following compares the return, risk and liquidity for the most common types of investments.
Property
| Property type | ReturnFootnote * | Liquidity | Risk |
|---|---|---|---|
Real estate Land and buildings such as a house or other property The greatest value of real estate to a homeowner may be that it provides a place to live. |
Depends on price, location, real estate market, etc. May include rent or capital gain (or loss) High cost of selling property reduces the return Capital gain on primary residence is tax-free |
Low compared to some other investments Takes more time to sell than many other investments do Depends on market conditions |
Low to high Depends on price, location, real estate market, etc. |
Personal property Jewellery, art, collectables, etc. The greatest value of personal property to its owner may be the pleasure it gives. |
Low to very high Depends on demand for the object Very speculative |
Low to moderate Takes time to sell many kinds of valuable objects |
Low to very high Depends on price and knowledge of the buyer |
Business Money you invest to finance a small business The greatest value of a business to the business owner may be that it provides a job. |
Low to high Success depends on the manager and on market conditions |
Low May be hard to sell |
Medium to high Depends on type of investment and on the skill and determination of the business manager |
Investments that pay interest (fixed-income securities)
| Investment type | ReturnFootnote * | Liquidity | Risk |
|---|---|---|---|
Treasury bills Issued by the federal and provincial governments Loan from the investor to the issuing government Sold in large denominations, starting from $100 Issued for a term of one year or less |
Difference between the purchase price and the value of the T-Bill at maturity, e.g., $990 for a value at maturity of $1,000 |
High since holders generally can easily resell the bills before maturity through investment dealers |
Very low Guaranteed by the governments that issue the bills |
Savings bonds Issued by the federal government and the governments of certain provinces Loan from the investor to the issuing government Term of one year or more |
Interest payment Most guarantee:
or
|
High or moderate May be redeemed at any time, at specific intervals or only at maturity, depending on the terms of issue Generally not transferable from one buyer to another |
Very low Guaranteed by the issuing government |
Guaranteed investment certificates (GICs) Issued by financial institutions Loan from the investor to the issuer Terms range from 30 days to 10 years. |
Earn a fixed interest rate at maturity The return on some GICs may vary based on the performance of an index, such as a stock market index (index-linked GIC). |
Low Most GICs must be held until maturity, but some can be cashed in early, subject to restrictions. |
Low to medium May also be insured by deposit insurance, in the event of bankruptcy of the issuer(some restrictions applyFootnote 1) Index-linked GICs may or may not carry a guarantee. |
Bonds Issued by governments and corporations Loan from the investor to the issuer In general, the issuer promises to pay a fixed interest rate to the buyer at certain intervals and repay a predetermined amount at maturity, usually at par value of $1,000. The term is generally from one to 30 years. |
In the form of interest paid at maturity or capital gain (or loss) if the bond is sold before maturity The value varies according to the fluctuation of interest rates and the issuer’s credit ratingFootnote 2 If the bond is held until maturity, the buyer will receive the return promised at the time of purchase. |
Sold through dealers If the issuer experiences financial problems, no resale market may be available. Normally traded in over-the-counter marketsFootnote 3 |
Low to high Risk is higher when the term to maturity is longer. A rise in interest rates or financial difficulties for the issuer will lower the value of the bonds. Holder has the right to a portion of the company's remaining assets if it is dissolved (prior claim over stockholders). |
Stock
Type of stock |
ReturnFootnote * |
Liquidity |
Risk |
|---|---|---|---|
Common stock Issued by corporations Also called shares Holder has an ownership interest in a corporation Generally with voting rights No maturity |
In the form of dividends and capital gain (or loss) |
High when traded on a stock exchange or in over-the-counter markets Some stocks have limited trading rights |
Medium to high Value may rise or fall considerably Holder has right to a portion of the company's assets after all other parties are paid if the company is dissolved. |
Preferred stock Issued by corporations Prior claim over common stockholders for dividends Generally without voting rights Most have no maturity, but some are redeemable at the issuer's option and some are convertible to common shares. |
Mainly through fixed dividends. Possible capital gain (or loss) Value linked to the fluctuation of interest rates and the issuer's net earnings |
High when traded on a stock exchange or in over-the-counter markets Some stocks have limited trading rights. |
Medium to high The suspension of dividends in case of financial difficulties or rising interest rates may lower the value of preferred stock. Right to a portion of the issuer's remaining assets if the issuer is dissolved, with prior claim over common stockholders |
Investment fund securities
Type of investment fund |
ReturnFootnote * |
Liquidity |
Risk |
|---|---|---|---|
Mutual funds Funds made up of amounts pooled by investors and managed on their behalf by a manager The manager invests the money in various types of securities depending on the fund's goals. Investors usually buy units in mutual funds set up as trusts. In some cases, they buy shares in mutual funds set up as companies. No maturity |
In the form of: • dividends Return is reduced by fees charged by managers and sales agents. |
High, but some funds may be limited Usually redeemable at any time Not traded on an exchange |
Low to high Depends on the mutual fund's investments, such as in bonds, stocks, etc. Most funds are not guaranteedFootnote 4. |
Exchange traded funds (ETFs) A fund made up of the same stocks as an index such as the S&P/TSX ETFs trade shares on a stock exchange. |
Primarily capital gain (or loss) when the holder sells shares in the ETF Return is reduced by fees charged by managers and sales agents Management fees are lower than with mutual funds. |
High ETF shares trade on stock exchanges. |
Low to high Depends on the index the fund tracks, such as bonds, stocks, commodities, etc. Most funds are not guaranteed. |
Segregated funds Issued by insurers Product that combines typical mutual fund investments with insurance coverage Guaranteed rate protects investment at maturity Assets held by an insurer separately from its other assets, hence the term "segregated funds" |
Similar to mutual funds Return may be slightly lower than mutual funds due to cost of guarantees and administration |
Similar to mutual funds Usually the term is 10 years for the maturity guarantee. The funds are renewable at maturity; however, the investor's age is taken into consideration. |
Low to high (same as mutual funds) Depends on the fund's investments Individual segregated fund contracts offer a guarantee that protects, at maturity, at least 75% of the amount invested. Moreover, insurers generally offer a death benefit guarantee. |
Labour-sponsored investment funds and similar funds Issued by a labour organization or a financial institution Investors buy common shares of the fund Provides investors with tax benefits One of the goals is to create or maintain jobs. |
Mainly in the form of a capital gain (or loss) Depends on the performance of the assets in the fund and the tax benefits |
Low Some funds are redeemable only at retirement, subject to exceptions such as purchase of a property, pursuit of education, loss of employment or launch of a business, disability or terminal illness. Another type of fund is redeemable after a certain number of years, unless the investor meets certain criteria, such as death, disability or terminal illness. |
Medium to high These funds typically invest a certain proportion of assets in start-ups or small and medium-sized businesses. |
Limited partnerships
Type of limited partnership |
ReturnFootnote * |
Liquidity |
Risk |
|---|---|---|---|
Limited partnership units Issued by a partnership A general partner manages the partnership and limited partners supply the capital Liability of limited partners limited to their investment outlay Often provide tax benefits transferable from the partnership to the limited partners |
In the form of dividends or capital gain (or loss) Depends on the partnership's profitability and the tax benefits available to investors |
Low No organized market for resale of these securities May involve resale restrictions |
Medium to high Depends on the nature of the partnership's activities May be suitable only for sophisticated investors Tax benefits may be cancelled If the partnership is dissolved, the remaining assets, after repayment of debts, are distributed to the limited partners. |
Income trusts
Type of income trust unit |
ReturnFootnote * |
Liquidity |
Risk |
|---|---|---|---|
Income trust units Issued by a trust that holds an interest in one or more companies The main categories of income trusts are: • business trusts Many trusts are designed to provide investors with tax benefits. |
In the form of income, royalties or capital gain (or loss) Depends on the operating profits of the companies held by the trust and the tax benefits |
High if trust units are listed on an exchange Low for certain trusts where there is not an organized market |
Medium to high Trusts linked to non-renewable resources may have high risk if the life cycle of the resource is difficult to estimate accurately. May be suitable only for sophisticated investors Tax benefits may be cancelled. |
Derivatives
Type of derivative |
Return Footnote * |
Liquidity |
Risk |
|---|---|---|---|
Options Financial instruments that give the holder the right to buyFootnote 5 (call option) or sell (put option) an asset at a fixed price for a specified period. The underlying asset may be a stock, a commodity, a currency or an index (such as a stock market index). |
If the option is exercised, the return will depend on the price of the asset, the price at which the option can be exercised (strike price) and the price of the right to the option (option price). If the option is sold before expiration, its value will depend on the time remaining before expiration, its strike price and the present or projected value of the asset. If it is not exercised at expiration, its value becomes zero. |
High when traded on an exchange, letting the holder exercise the option by buying (or selling) the underlying asset, or not exercise it at all Low for options that are not traded on an exchange, as they may be transferable or non-transferable |
Medium to high Depends on how they are used, e.g. for hedging or speculation (hedging is trying to offset an increase or decrease in the price of an underlying asset) May be suitable only for sophisticated investors |
Futures and forward contracts Contractual agreements whereby the seller agrees to deliver a specific amount of an asset (such as a commodity) to the buyer at a particular price on a stipulated future date Futures and forward contracts are traded in a variety of commodities (grain, meat, etc.) and financial products (stock market indexes, bonds, common stocks) The contract must be honoured at the settlement date. |
Similar to options |
Liquidity varies according to the underlying asset. Futures contracts are traded on an exchange. Forward contracts are traded in over-the-counter markets and have little liquidity. |
Similar to options May be suitable only for sophisticated investors
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