7.3.1 Comparing investments

From: Financial Consumer Agency of Canada

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
(T-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:

  • a fixed annual rate of return until maturity

or

  • a minimum rate of return that can be increased by the issuer if market conditions change.

 

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
• interest
• capital gain (or loss) realized by the fund or when the holder sells units

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
• real estate investment trusts (REITs)
• resource trusts
• utility 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

 

There are many other forms of investment. Before buying, look for expert advice to be sure you fully understand your investments and how they fit your investment goals.
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