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This guide provides an overview of some common types of securities in terms of three basic characteristics - liquidity, expected return and risk:
Liquidity (or Marketability) is the ease with which you can turn your investment quickly into cash, at or near the current market price. Some securities, such as mutual funds, offer liquidity by allowing investors to redeem their securities (return them to the issuer) on short notice. For non-redeemable securities, liquidity will depend on the owner’s ability to sell the securities to other investors in the open market. Listing on a stock exchange may help, but does not guarantee liquidity. With some securities, investors may be restricted by law or contract from reselling the securities for months or even years, or they may find that there is no market for the securities when they want to sell.
Expected Return is the overall profit that you might expect to receive from your investment - either as income, in the form of interest or dividends, or as capital gains (or losses) resulting from changes in the market value of the security. In theory, the higher the expected rate of return of a security, the greater the risk.
Risk is the degree of uncertainty about your expected return from an investment including the possibility that some or all of your investment may be lost. With some securities there is very little risk that investors will lose any of their initial investment. With some other securities, the risk of loss can be very substantial.
In addition to considering these factors, you must also consider your own financial needs and objectives, your tolerance for risk and other issues, such as taxes, before making any investment decision.
Income tax considerations are important because they will affect your net return from an investment. Interest, dividends, capital gains and capital losses are all treated differently for tax purposes. For example, if the return on your investment is in the form of:
Tax legislation provides some significant tax benefits for individuals who make qualifying investments through tax-deferral plans. Consult your financial advisers about your eligibility to contribute to plans and whether or not they will meet your financial needs and objectives.
Some types of securities - like units of labor-sponsored funds and flow-through shares - also take advantage of special tax incentives provided by the federal or provincial governments. The tax implications of these securities for individual investors can be complex and expert advice should always be sought.
Remember though, that tax implications should not be the only factor you consider when making an investment decision. Each potential investment should be analyzed first on its own merits, on how it will affect the risk and expected return of your overall investment portfolio and on how it will fit your personal financial objectives and investment time horizons.
In an economic climate characterized by market volatility and low interest rates, income trusts are a hot commodity. Low-risk investments offer safe, but low yields. Searching for higher potential returns, many volatility-shy investors have shifted their investments to income trusts. Despite a common perception to the contrary, income trusts are not fixed-income investments and returns are not assured. They are not suitable investments for everyone.
An income trust is an entity that holds an underlying asset or group of assets. Most of the income, these assets generate is distributed to unit holders. In contrast, publicly listed companies usually retain and re-invest their earnings, and sometimes pay out a small portion of earnings to their shareholders as dividends.
An income trust structure is formed when, instead of offering its securities directly to the public, an operating entity creates a trust. The trust offers units to the public and uses the proceeds to purchase the common shares and high-yield debt of the operating entity. The combination of the trust's equity and debt holdings allows the income to flow through to unit holders essentially tax-free.
The income trust structure offers a number of tax advantages to both the operating entity and investors. As well, current market conditions favor income trusts over conventional initial public offerings (IPOs). Investors often view income trusts as stable and conventional IPOs as risky. The reality is that both types of investment carry varying degree of risk.
Risk and Return
Income trusts are not conservative or fixed-income investments - they are equity-like investments that carry varying degrees of risk. Income trust distributions are not assured and depend entirely on the financial performance of the underlying entity. Also, part of the “return” of an income trust may be repayment of your own capital - the money that you invested in the first place.
Just like any security, the quality of income trust investments varies. In order to obtain a stability rating, a trust must submit an application and a fee, and respond to detailed inquiries from the ratings organization. Not all income trusts are rated. For this reason, consider the stability rating along with other pieces of information.
The risk profiles of individual income trusts depend on many factors, including, but not limited to:
Tax Treatment and Regulation
The projected returns and favorable tax treatment associated with income trusts may look attractive, but the factors affecting the tax position of the trust and investors are very complex. The prospectus describes the business of the trust as well as the possible tax consequences.
Units of income trusts are initially sold by way of a prospectus offering in the primary market. Units are then listed and traded on a stock exchange (a secondary market). For securities regulation purposes, income trusts that distribute securities under a prospectus are reporting issuers and are subject to all of the continuous disclosure obligations of other reporting issuers.
Income trusts are sophisticated investments. Make sure you read and understand the prospectus and other disclosure documents describing the trust and the securities.
The cornerstone to investor protection is to ensure that you have access to accurate and up-to-date information about any company or mutual fund in which they might choose to invest. Public access to information to make sound investment decisions is why companies and mutual funds are required to prepare prospectuses, financial statements and other public disclosure materials.
A prospectus is invaluable as the starting point to making an informed decision. It gives you and your financial advisers information about a company or mutual fund, including information on products, management, financial and strategic planning, and risks. Reading a prospectus is the first step to becoming an informed investor.
A prospectus is a detailed document that normally must be prepared whenever an issuer (company, limited partnership, trust or mutual fund which is selling their securities) plans to sell securities to the public. It must, by law, provide full, true and plain disclosure of all important facts relating to the securities being issued. It must also be accepted for filing by the securities regulators and delivered to every person who buys the securities. Some jurisdictions allow a summary simplified prospectus, which is an abbreviated version. This is supplied to investors, although the detailed prospectus is available on request.
When an issuer decides to sell its securities to the public, it first prepares a preliminary prospectus and files that document with International Securities and Markets Authority for review. A preliminary prospectus has most of the information that will end up in the final version of the prospectus, but may be missing certain information such as the price or number of securities being sold.
Once the preliminary prospectus has been properly filed, the issuer can use it to find out if investors are actually interested in buying the securities, provided that each potential investor gets a copy of the preliminary prospectus. The issuer cannot actually sell their securities using the preliminary prospectus, they can only find out if people are interested in buying.
When the review has been completed, the issuer prepares and files a final version of the prospectus and International Securities and Markets Authority issues a receipt for it. Once the prospectus receipt has been issued, the issuer may begin to sell their securities.
Anyone selling securities to the public will need to use a prospectus, but what you will find in a prospectus will depend on how the issuer is set up.
A typical prospectus for a corporation includes:
In addition, you should find answers about:
Prospectuses are required by law to contain the facts. It is the facts, not promotional hype or sales pitch that should be the basis for investment decisions.
A prospectus allows you to protect yourself by giving you detailed information about the issuer and about the securities being sold. In the prospectus, you can find answers to many of the questions you would naturally ask before making an investment.
Some questions might include:
Securities laws require issuers to take great care to ensure the statements made in their prospectuses are accurate, as it is illegal to file a false or misleading prospectus. If material misrepresentations are found in a prospectus, each person who bought securities under the prospectus has the right to sue for the return of their money (rescission) or damages. A misrepresentation can be false information in the prospectus, or information that was not included in the prospectus which might better explain the facts in the prospectus. A material misrepresentation is one that would affect the value of the security being sold. The law also protects you by giving you the right to withdraw from any purchase under a prospectus for two days after you or in some cases their financial adviser receives the prospectus.
The fact that International Securities and Markets Authority accepts a prospectus is not a ‘seal of approval’ that the securities are a safe investment or are suitable for you to invest in. You and your adviser must determine if it is the right investment for you.
Securities sold using a prospectus can be traded among investors. The price that they trade at and how quickly they can be sold are determined by what kind of market there is for the securities you bought.
Just because securities are sold using a prospectus does not mean they will be listed on a stock exchange. If they do not trade on a stock exchange, this can affect an investor’s ability to sell the securities they purchased as there may not be interested buyers.
Read the prospectus - it will tell you if the shares are going to be listed on an exchange and on which exchange. The purpose of a prospectus is to protect the investor. By reading it, you will have the information you need to make a sound investment decision.
The mutual fund industry has experienced tremendous growth in the last decade. For many investors, mutual funds offer distinct advantages over traditional investment and savings vehicles, offering potentially greater returns, professional management and diversification.
Despite stringent guidelines for mutual fund information disclosure, however, many investors still think of mutual funds as “no fee” investments. In fact, mutual fund fees can significantly impact your investment returns.
There are three basic categories of mutual fund fees:
Values range according to the cost of managing each fund, but a maximum must be specified in the simplified prospectus of the fund. While 1-5% may seem like a small price to pay, remember that a fee increase of just 1% (from 1-2%) on a $10,000 investment earning 8% annually can reduce the value of the investment by more than $5,000 over 20 years.
Sales fees are somewhat flexible, in that you have a choice of the type of sales charges you pay. Front load fees are charged against your initial investment as a percentage, and paid to the mutual fund dealer. You may be able to negotiate these fees.
Deferred charges, also called back-end load fees or redemption fees, are deducted from your investment if you cash in before a certain time period. These fees decline each year that you hold the investment. Deferred sales charges are paid to the mutual fund management company and some companies allow you to cash in up to 10% of your investment annually without paying these fees. Funds without front load or deferred charges are known as no load funds and their distribution costs are included.
Special fees may be applied to your fund account, or billed directly. The following list contains examples of special fees:
There is a wide variety of mutual funds with different fees and objectives; make sure of the available resources to make an informed investment decision.
Besides investing directly into stocks and bonds, more experienced or sophisticated investors may use stock options to try to turn a profit on the stock market.
If you believe the value of a certain stock will rise and you want to take advantage of this without investing directly in the stock, then you could buy a call option and become an option holder. You do this by paying a “premium” to the option writer who is the person who sells the option.
A call option gives you, as the option holder, the right, but not the obligation, to buy a stock at a certain price. When you buy a call option, an expiry date comes with it. If the stock rises as you had hoped before the expiry date, then there are two ways to profit from the rise in the stock. The first is to sell the option for a higher price than you paid for it. The second is to “exercise” the option, which involves formally buying the stock and then selling it at the prevailing market price. This is referred to as ‘exercising’ the option.
If you do not exercise or sell your call options by the date the option expires, it becomes worthless and you lose the price you paid for the options. If you believe that the value of a stock will fall and want the option to sell a stock at a certain price, you would buy what is known as a put option and then sell the stock at the higher price.
Options don’t pay dividends or interest. Returns depend mainly on changes in the market value of the underlying asset (the stock it is linked to buying or selling), although there are other factors that affect the price of options, especially the amount of time left until the option expires.
Options are usually traded on an exchange separately from the stocks they are linked to. It is possible to use options for a number of purposes. First, one can speculate by using an option to take a position about which way a market will go. This may be through an option based on an individual stock or an option based on an index. The second is to hedge, or to protect yourself, against potential movements in the market that would lead to erosion in the value of your investment.
If you buy an option, your loss is limited only to the premium, but if you sell (“write”) an option your loss can, in theory, be unlimited. Options are quite technical. They can be complicated and need to be watched and traded carefully.
The phrase "offshore banking" may conjure up images of tropical islands and suave James Bond-type gentlemen discretely discussing multi-million dollar deals. But in the Internet age, the picture of offshore banking is more likely to include sleazy con men trying to pry every last dollar from trusting investors.
Con men have set up shop in lightly regulated areas throughout the world and they're using the Internet to troll the globe for victims.
Use any Internet search engine and type in the phrase "high yield offshore investments." The search engine will return a lengthy list of Websites all designed to separate an innocent investor from his or her money.
Some of these sites promote "investment clubs" where an initial investment of several thousand dollars is required to get into "the club." Some of these sites also offer to pay "referral fees" if you convince others to invest as well.
Other sites claim to represent "international banks" with offers of investment opportunities providing astronomical returns – often as much as 200%.
These websites have one thing in common: they never explicitly tell you how the investment works. Instead they cloak their offer with complicated language about international banking, prime bank instruments and a secret world of banking operations only available to the very rich.
When you see these kinds of offers, alarm bells should start ringing. Most of these sites are scams, designed to suck as much money from you as possible. Many of these websites are designed to appeal to people who distrust government. The sites play up the idea that you can make huge returns and avoid paying taxes by moving your money to an offshore account.
Legally, you can send money offshore as long as taxes are paid on the money and any interest earned. By encouraging you to invest to avoid taxes, these sites are encouraging you to break laws.
Anyone selling offshore investments still needs to be registered. In most cases, the people using the Internet to sell offshore investments to you are not registered. They are violating securities regulations. That means you're taking a huge risk if you choose to put your money into an offshore investment promoted through the Internet.