An investor needs a solid understanding of the basics of investing. Learning about terms such as risk, return on investment, and diversification can go a long way to making better decisions when working with a registered investment advisor.
InvestRight.org has plenty of information to help investors get an overview of investing. Visit the Investing 101 section for more on what’s described in this article.
What is Risk?
Risk is the possibility of losing some or all of the money you have invested. Investors take risks to earn capital gains, interest, or dividends.
Risk tolerance is the willingness to accept a level of risk to achieve a certain return. Your personal financial situation is a major factor in determining your risk tolerance. We have a risk test you can take to see how comfortable you are with different levels of risk.
What is Diversification?
When an investor considers diversifying a portfolio, they usually look at three categories of investments: equity investments, fixed-income investments, and cash. Investment advisors can help determine how much of each investment category is needed to appropriately diversify investment holdings.
How Do I Buy and Sell Investments?
The following questions can prepare you for a conversation with a registered investment advisor before you buy or sell an investment:
- Is this investment suitable for me?
- How does this investment work and how will it make money?
- What are the risks?
- Does this investment come with a guarantee?
- How much will it cost me?
- Are there better alternatives?
- How liquid is this investment (how easy or hard is it sell the investment)?
You may also want to review the Fraud Warning Signs. If you suspect that an investment offer is a scam, report it or the person selling it to the British Columbia Securities Commission.
Most investors go through an advisor or brokerage to purchase an investment. There are other steps in the process depending on how much money you wish to invest and your personal financial situation. Keep on top on the fees and charges that come with trading securities, too.
What are Investment Fees and Charges?
Generally, investors pay fees to their advisor or advisor’s firm as well as fees for products such as mutual funds or exchange-traded funds (ETFs). Investment firms may charge management fees, brokerage commissions, trading fees, or provide other services for a flat fee. Mutual funds and ETFs can come with management fees, trailing commissions, sales charges, and other trading fees.
CRM2: Report on Charges and Other Compensation
New securities laws require investment advisory firms to provide all clients with a detailed annual report of operating, transaction, and related fees. Your advisor will send a Report on Charges and Other Compensation each year. Read it, look at how much you pay in fees, and ask questions if you do not understand.
What is the Private Placement Market?
The private placement market is often called the exempt market because participants use various exemptions from securities laws to raise money privately.
Investors should be cautious when investing in private companies or through the private placement market. It is up to you to gather the information about a company, including finding out as much as possible about its management team, financial situation, viability as a business, and financing activity.
BCSC InvestRight has a Private Placement Market Investing Guide for investors curious about this market. You can also review the BCSC’s Exempt Distribution Reports for previous private financing activity in the British Columbia.
What is Return on Investment or ROI?
Return on investment, commonly called ROI, is the gain or loss generated on an investment. A gain or loss can come from interest rates, dividends, or market changes over time. ROI is usually expressed as a percentage of the original invested amount.
Every year, registered investment advisors must provide clients with an Investment Performance Report that includes personal rates of return. Your personal rate of return is calculated based on the change in value of your investments, the amount of deposits, and other specifics.
What are Some Types of Investments?
When it comes to investment types, investors may be familiar with some or all of these common choices:
- Guaranteed Investment Certificates (GICs)
- Bonds or fixed-income securities
- Shares or equity investments
- Investment funds (mutual funds, exchange-traded funds, etc.)
- High-risk investments (forex trading, hedge funds, crowdfunding, etc.)
Before coming to a decision, think about how an investment fits into your investment plan, diversification strategy, and other personal factors. You may want to discuss any new investments with a registered investment advisor or professional you trust, such as an accountant or lawyer.
What are Some Types of Accounts?
Most Canadian investors have access to these common investment accounts:
- Registered Retirement Savings Plans (RRSPs)
- Tax-Free Savings Accounts (TFSAs)
- Registered Retirement Income Funds (RRIFs)
- Registered Education Savings Plans (RESPs)
- Registered Disability Savings Plans (RDSPs)
- Non-registered investment accounts
Remember: RRSPs and TFSAs are accounts, not investments. Investors should always know what types of investments are in each of their accounts.
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using the BCSC’s online complaint form.
InvestRight.org is the British Columbia Securities Commission’s investor education website.
Learn about consumer understanding of crypto-assets
New Year’s Resolution re your financial advisor: Ask for more accountability and better communications
In an article in globeinvestor.com, Dan Richards (Strategic Imperatives) makes the point that after last year’s market debacle, more people are doing their homework on how and where they should be investing their money. The net result is that they are asking tougher questions, requiring financial advisors to spend more time and effort responding with evidence and […]