How does investing work? The basics

Saving versus investing—What’s the difference?

When you receive your paycheque, you can do two things with your money: spend it today or save it for the future. Investing takes the save it option one step further by offering you ways to grow your savings over time. 

Putting money away today so that you have it available in the future—that’s what saving and investing have in common. That’s also where their definitions start to go in different directions. 

What’s saving?

You probably use a savings account at a bank to save money, usually for the short term. Inside a savings account, your money is safe from drastic fluctuations in value. A dollar in a savings account will continue to be worth a dollar, with a small portion of interest added over time. Your money is also insured up to a certain amount at most banks and credit unions. It’s also easy to access to withdraw your money when you need it. 

What’s investing?

When you invest, you’re buying something with your savings in the hope that it will earn more money for the long term. Investing can help you grow your savings so you can purchase a car, renovate your house, or fund your retirement.

You can invest on your own through a personal account or as part of a group retirement plan. You may also want to seek the help of a financial advisor if you’re not comfortable making investment decisions on your own.

Most investments can increase your wealth in at least one of two ways: by generating income or by growing in value. Depending on the investment:

• You may earn money by receiving periodic payments while you own the investment
• You may earn interest while you own the investment
• You may earn money by selling the investment for more than you paid for it. Keep in mind that some investments do indeed grow over time, but some may lose value over time

The three basics of investing

Time

Usually, the more time you have, the more risk you can take with your investments. The longer you can leave your money invested, the greater your chance of earning positive returns on your retirement investments, or other.

Ask yourself:

• What are you investing for—a trip, a house, your retirement?
• How long do you have before you need the money?
• How much do you need to save for retirement?

Knowledge

You don’t need to be an expert, but a little knowledge can make your decisions easier. 

Consider:

• How interested are you in choosing investments?
• How much effort do you want to put in?

Risk

Taking on more risk can lead to higher returns but there’s a greater chance for losses as well.

What are some common investment options?

The three basic classes of investments are:

Guaranteed investments

You can invest in products such as guaranteed income certificates (GICs) for a specific length of time and earn interest. The money you invest in a GIC is guaranteed. It’s the closest in terms of safety to a savings account.

Equities (also known as stocks)

When you buy a company’s stock, you’re buying a small stake of the business. Generally, if the company performs well, the value of the stock will increase, and if it performs poorly, the stock price will fall.

Fixed income (the most common ones are bonds)

When you buy a bond, you’re lending money to the company or government selling the bond, and they promise to pay you back over a certain period of time with interest. 

What about investment funds? 

Instead of purchasing one stock or one bond, you can purchase a professionally managed fund that can be made up of different investment options. Each fund follows a specific strategy. For example, an international stock fund would likely invest in the stock of hundreds of non-Canadian companies. 

Two popular types of funds are mutual funds and exchange-traded funds (ETFs):

• Mutual funds are common investment options for retirement plans. They can be actively or passively managed. To buy or sell a mutual fund, you generally place your order and receive the price at the end of the trading day. 
• ETFs are common in personal accounts and they’re usually passively managed. ETFs can be traded and priced at any time during the trading like individual stocks. 

Invest your money wisely

Investing, for retirement or another purpose, can help you achieve your financial goals and has many advantages over simply saving, especially when you invest over a long period of time. Don’t forget to review your investments on a regular basis to be sure they continue to align with your overall strategy and goals. And if you’re still unsure about investing on your own, consider speaking with a financial advisor to get help.