Investments: Where People Put Their Money

People invest in a variety of things, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, and cryptocurrencies. Some of the most common investment vehicles are stocks, ETFs, mutual funds, bonds, certificates of deposit (CDs), and high-yield savings accounts.

The best approach for investing depends on several factors, such as an individual's risk tolerance, the amount of money they have to invest, and their time horizon. For instance, stocks are generally considered riskier but can offer higher returns, while bonds and fixed-income investments are less volatile but may provide lower long-term returns.

Additionally, people may invest in different things based on their financial goals. For example, investing in stocks, bonds, mutual funds, or real estate can help save for retirement, while investing in a business or a new venture can provide the opportunity to be part of something exciting and support entrepreneurs.

Stocks

There are two main kinds of stocks: common stock and preferred stock. Common stock entitles owners to vote at shareholder meetings and receive dividends. Preferred stockholders usually don't have voting rights but they receive dividend payments before common stockholders do, and have priority over common stockholders if the company goes bankrupt.

• Set clear investment goals: Be precise about your objectives, determine your investment horizon, evaluate your finances, rank your goals, and adapt as your life changes.
• Determine how much you can afford to invest: Review your income sources, establish an emergency fund, pay off high-interest debts, and create a budget.
• Determine your tolerance for risk: Reflect on your comfort level with the ups and downs of the stock market, consider your time horizon, gauge your financial cushion, and align your investments with your risk levels.
• Choose an investment account: Understand the different account types, consider the tax implications, evaluate account fees and minimums, and check for added features.
• Fund your stock account: Choose how you'll fund it (e.g. bank transfer, check deposit, transfer from another brokerage), set up automatic contributions, and start investing.
• Pick your stocks: Look for stability, a strong track record, and the potential for steady growth. Examples of stocks that are likely to be solid bets for beginners include blue-chip stocks, dividend stocks, growth stocks, defensive stocks, and ETFs.
• Learn, monitor, and review: Read widely and regularly, use stock simulators, and learn about diversification.

Bonds

There are three main types of bonds: corporate bonds, municipal bonds, and treasury bonds. Corporate bonds are debt instruments issued by a company to raise capital for initiatives like expansion and research and development. Municipal bonds are issued by a city, town, or state to raise money for public projects such as schools, roads, and hospitals. Treasury bonds (also known as T-bonds) are issued by the US government and are considered risk-free.

When investing in bonds, it is important to consider factors such as the maturity date, the bond's rating, the bond issuer's track record, and your own tolerance for risk. It is also crucial to understand the broader market and economic conditions that can impact the value of bonds, such as interest rate changes and inflation.

Real estate

There are two types of real estate investing: direct and indirect. Direct real estate investments involve owning and managing properties. Indirect real estate involves investing in a pool of money that is used to buy and manage properties.

• Rental Properties: Owning rental properties is a good choice for individuals with DIY skills, the patience to manage tenants, and the time to manage the property. Rental properties provide regular income and potential appreciation. Many expenses are also tax-deductible. However, managing tenants can be tedious, and unexpected costs and vacancies can eat into income.
• Real Estate Investment Groups (REIGs): REIGs are ideal for people who have some capital and want to own rental real estate without the hassle of managing it. REIGs are similar to small mutual funds, pooling money from multiple investors to buy rental properties. A single investor can own one or multiple units, but the company collectively manages all the units, handling maintenance, advertising vacancies, and interviewing tenants. REIGs provide income and appreciation with a more hands-off approach, but they are susceptible to unscrupulous managers.
• House Flipping: House flipping involves buying undervalued properties and quickly selling them for a profit. This strategy requires significant experience in real estate valuation, marketing, and renovation. It can offer significant returns but ties up capital and requires deep market knowledge.
• Real Estate Investment Trusts (REITs): REITs are ideal for investors who want exposure to real estate without a traditional real estate transaction. REITs are created when a corporation uses investors' money to purchase and operate income properties. They are bought and sold on major exchanges like stocks. REITs pay out dividends, and some are highly liquid as they are exchange-traded trusts. However, investors should be aware of the risk of a real estate market downturn and liquidity risk if the REIT is not publicly traded.
• Online Real Estate Platforms: Real estate investing platforms allow investors to join others in investing in large commercial or residential deals. These platforms, also known as real estate crowdfunding, offer the opportunity to diversify into real estate without a large stake. However, they tend to be illiquid with lock-up periods, and management fees can reduce profits.

While real estate investing can be lucrative, it is important to remember that it requires time and often more cash flow. Additionally, as with any investment, there is profit and risk, and markets can go up and down.

Savings accounts

Many savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per FDIC-insured bank, per ownership category. This means that you won't have to worry about losing your deposits as long as you stay within federal insurance limits.

With a savings account, you can earn interest on your cash balance, though the returns are generally lower than those of other investments. Online savings accounts tend to offer higher rates than traditional banks with physical branches, as they have fewer overhead costs.

If you're looking for a savings account with a high interest rate, you might want to consider a high-interest savings account (HISA). HISAs are offered by most banks and financial institutions in Canada and typically earn more interest than regular savings accounts. While the interest rates of Canadian HISAs usually fall in the 1-2.50% range, some institutions provide special promotional rates above 4%. HISAs are a good option if you want to save for shorter-term goals, such as paying for a wedding or a vacation, or large but predictable expenses like a car or a home.

When choosing a savings account, it's important to consider the initial deposit required, the reputation and security of the bank, the interest rate, and any fees or transaction limits.

Cryptocurrency

Types of Cryptocurrency

There are many different types of cryptocurrency, or "crypto" for short. As of May 2024, there were over 2.4 million. Bitcoin was one of the earliest cryptocurrencies created and remains the best known. All other coin-based cryptocurrencies are called “altcoin,,” or alternative to bitcoin. Some other popular cryptocurrencies include USDC (US Dollar Coin), Ethereum, Dogecoin, Cardano and Solana.

What to Consider Before Investing in Cryptocurrency

Pros of Investing in Cryptocurrency

• Prior to 2022, the price of cryptocurrencies was not highly correlated to other investment classes, so having a small exposure may improve risk-adjusted returns.
• Some experts compare certain cryptos, such as Bitcoin, to gold: both are fungible, durable, scarce, and their purchasing power is not defined by any central authority.
• Thanks to the decentralisation and transparency of the distributed ledger, it is difficult to compromise the network integrity behind cryptocurrencies.

Cons of Investing in Cryptocurrency

• The cryptocurrency market is highly volatile; it can be difficult to predict when values will rise or fall.
• Cryptocurrencies are not currently subject to much government regulation, so transactions don't come with legal protection.
• Though crypto blockchains are very difficult to hack, individuals can be susceptible to hacking, due to the same risks inherent in any online activity.

How to Invest in Cryptocurrency

• Choose what cryptocurrency to invest in.
• Choose a reputable cryptocurrency exchange, such as Coinbase, Gemini, or Kraken.
• Explore storage and digital wallet options. You can keep your cryptocurrency on the same platform where you’re investing, or use a "hot" or "cold" digital wallet. A hot wallet is accessible via the internet, while a cold wallet is a physical storage device that keeps your cryptocurrency keys completely offline.
• Decide how much to invest. Most exchanges allow you to invest in a cryptocurrency with a high value per coin on a dollar basis, rather than buying a whole coin.
• Manage your investments. Cryptocurrency can be used to buy things or held as a long-term investment.

Some experts recommend investing no more than 1% to 5% of your net worth in cryptocurrency. It is important to never invest more than you can afford to lose, and to limit your overall exposure to crypto.

Frequently asked questions