Self-Directed Accounts and Investments

A stock (also called an equity or share), is an investment that lets you own part of a public corporation and may allow you to vote on key decisions about its future. Stocks let you take part in a company’s gains—like capital gains and potential dividend income—and losses, too.

Think of exchange-traded funds (ETFs) as a variety pack of stocks, bonds and other investments that can add diversification to your portfolio without the same price tag as purchasing the investments individually. ETFs trade on major stock exchanges throughout the day, and the investments in them track specific market indices, sectors or commodities (such as oil).

A mutual fund is a pool of investments in stocks, bonds or other securities funded by individual investors who own units of the fund. A mutual fund's strategy may focus on a specific sector, region or asset class, or may invest in various asset classes. Because a mutual fund holds multiple investments, it may provide a degree of diversification.

Mutual funds are managed by portfolio managers who buy and sell the securities in the fund’s portfolio and monitor market conditions. Some funds are actively managed, meaning that the portfolio manager selects securities according to his or her investment philosophy and judgment in an attempt to outperform the market. Other funds, known as index funds, are passive investments that attempt to simply mirror a market index, such as the S&P/TSX Composite Index of Canadian stocks. In either case, the transaction and administration costs of the fund are spread among all of its investors.

Mutual funds are not listed for continuous trading and pricing on a stock exchange. Instead, mutual fund companies sell their own shares (or units) to investors and buy back their shares when investors redeem them. New shares may be issued if investor demand exceeds redemptions.

If you're thinking about investing in mutual funds, here are a few advantages to consider:

• Built-in diversification: When you purchase a mutual fund, you're investing in a diversified portfolio of investments that can include stocks, bonds and cash. Diversification can reduce risk by spreading assets among various asset classes, geographic regions or industrial sectors.
• Professional management: Actively managed mutual funds allow you to take advantage of professional investment management. The cost of the portfolio manager's expertise, called a Management Expense Ratio (MER), is shared by all the fund's investors.
• Your choice of asset classes and fund types: Select from a wide range of mutual funds to fit your investment needs.

A bond is a loan made by an investor to an issuer. In turn, the issuer promises to pay the investor a specified rate of interest (the coupon) usually every six months and repay the principal (or face value) of the bond at a future maturity date. The major issuers of bonds are governments and corporations.

Treasury bills or T-Bills are short-term debt instruments issued by federal and provincial governments. Fully backed by the applicable government issuer, a high level of security makes T-Bills a popular investment for individual, institutional and corporate investors.

A Guaranteed Investment Certificate (GIC) is a deposit investment issued by financial institutions such as chartered banks, trust companies and mortgage and loan companies. They guarantee your original investment—plus a specific rate of return for a term that you choose—and offer a reliable, low-risk investment over a set period of time.

Many GICs are guaranteed by the Canada Deposit Insurance Corporation (CDIC) for up to $100,000 (this includes both principal and interest), provided that certain criteria are met. Each individual issuer can provide full CDIC coverage, which means that you could invest, for example, $100,000 each (including principal and interest) with four different issuers — all CDIC-insured. Visit the CDIC website to learn more about coverage.

Options are essentially contracts between two parties that give you the right to buy or sell an underlying asset at a certain price within a specific amount of time.

An option's value is tied to the underlying asset, which could be stocks, bonds, currency, interest rates, market indices, exchange-traded funds (ETFs) or futures contracts. Options are securities themselves, like a stock or bond, and because they derive their value from something else, they're called derivatives.

There are two main types of options contracts: calls and puts. Owning a call gives you the right to buy the underlying asset; owning a put gives you the right to sell that underlying asset. An easy way to keep them straight is to remember that a call would "call" an asset away, while a put would "put" it to someone else.