Investment and Savings Notes

Saving and Investing

Saving

  • Saving is setting aside money for future use.
  • It's the opposite of consuming.
  • It is the difference between income and spending.

Investing

  • Investing is using savings to earn extra income.

Savings Plan

  • A savings plan involves regularly putting money aside to achieve a financial goal.

Reasons for Saving

  • Emergency needs
  • Short- and long-term goals
  • Security
  • Future needs

Benefits of Savings Plans

  • Easy to open.
  • Pay a fixed rate of interest.
  • Protect money against loss.

Earnings and Yield

Deposit

  • A sum of money placed in an account at a financial institution.

Interest

  • The money paid for the use of borrowed or loaned money over a period of time.

Rate of Return/Yield

  • Interest expressed as a percentage of the original investment; also called yield.

Simple Interest

  • Interest calculated only on the principal amount loaned or deposited.

Compound Interest

  • Interest calculated on the amount saved or borrowed plus any interest already accumulated.

Liquidity

  • The ability to convert an asset or investment into cash quickly and easily.

Common Savings Plans

  • Term Deposits
  • Guaranteed Investment Certificates (GICs)
  • Registered Retirement Savings Plans (RRSPs)
  • Registered Education Savings Plans (RESPs)

Savings Accounts

  • A safe vehicle for savings of any amount.
  • Intended for people who want to save money while earning interest.

Term Deposits

  • A savings plan in which a fixed sum of money is deposited for a specific length of time, paying a fixed rate of interest, higher than that paid on regular savings accounts.

GIC (Guaranteed Investment Certificates)

  • A savings plan in which a fixed sum of money is deposited for a period of time, or term, at a fixed rate of interest.
  • Similar to a term deposit, but usually involving a larger sum of money invested for a longer period of time.

RRSP (Registered Retirement Savings Plan)

  • Introduced in 1957 to encourage people to save money for retirement.
  • Allows you to invest a portion of your yearly income without paying income tax on it.
  • A long-term savings plan that builds up a savings fund for a person's retirement.
  • Tax is deferred on money earned in the plan until it is withdrawn.

RESP (Registered Education Savings Plan)

  • A tax-sheltered plan designed to help finance post-secondary education.
  • Anyone can contribute to an RESP to save for a beneficiary's education costs.
  • A long-term, tax-sheltered savings plan to finance a child’s post-secondary education.

Common Forms of Investments

  • Corporate Bonds
  • Stocks
  • Mutual Funds
  • Real Estate
  • Collectibles
  • Online Investments

Diversification

  • The process of including more different types of investments to lower risks.

Canada Savings Bonds (CSB)

  • A loan made by you to the government of Canada.
  • The government repays the value of the bond plus interest earned on or before the maturity date.
  • The maturity date, printed on the bond, is when the bond becomes due and is paid.

Corporate Bonds

  • Businesses raise money by selling corporate bonds and shares of stock.
  • A bond is a promise to repay borrowed money on a certain future date, along with interest.
  • It is guaranteed by specific assets of the company issuing the bond.

Investing in Stocks

  • When you invest in a stock, you become a part owner, or shareholder of that company.
  • Stocks do not have a maturity date and can be held as long as the shareholder desires.
  • Stock prices go up and down and are influenced by supply and demand.

Shareholder

  • A part owner of the company after investing in a stock.
  • Shareholders share both the risks and rewards of the company.

Bull Market

  • When the demand for and prices of most stocks are high.

Bear Market

  • When the offer to sell stocks exceeds the orders to buy stocks, and prices fall.

Common Stock

  • The most available stock.
  • It gives the owner a voice in the operation of the business.
  • Common shareholders have the right to attend the company's meeting and to vote on company matters.

Preferred Stock

  • Preferred shareholders are paid first if the company makes a profit.
  • These shareholders have no voice in the company.
  • There is less risk in owning one, as prices and dividends are usually stable.

Stock Exchanges

  • Investors buy and sell stocks with the help of stockbrokers/online services through the stock exchange.
  • The three most common stock exchanges in Canada are the TSX (Toronto Stock Exchange), NYSE (New York Stock Exchange), and NASDAQ (National Association of Securities Dealers Automated Quotations).

Mutual Funds

  • A pool of money from many investors that is managed by an investment company to buy and sell securities of other corporations.
  • Professional investment managers make decisions for you.

Real Estate

  • Land and anything attached to it.
  • Involves the purchase of a house, cottage, condominium, or piece of property.

Collectibles

  • Any item of personal interest to a collector that can increase in value over time.
  • A collectible will increase in value only if it is popular and hard to find, or if it is produced in a limited edition so that the demand for it far exceeds the supply.

Business Investments

  • To Manage Extra Cash
  • To Generate Income
  • To Support Business Growth and Strategy

Insider Trading

  • Buying or selling a company's stock using secret, important information that the public doesn’t know yet.
  • Illegal if the information comes from inside the company and gives the person an unfair advantage.

Martha Stewart Case

  • Involved in an insider trading case in 2001.
  • Sold shares of ImClone after her broker told her that the company’s CEO and his family were selling their stock based on secret information about a rejected drug.
  • Found guilty of lying to investigators and trying to cover it up.
  • Served five months in prison for those charges in 2004.

Forex Scam

  • Fraudsters trick people into investing money in fake or risky currency trading schemes by promising guaranteed profits.
  • Often use unlicensed brokers, fake trading platforms, or misleading tactics.
  • Leads to financial loss.

Ponzi Scam

  • Promises big profits but secretly uses money from new investors to pay old ones.

Bernie Madoff & Charles Ponzi

  • Charles Ponzi did this in the 1920s.
  • Bernie Madoff ran the biggest Ponzi scam ever, tricking people for years until it collapsed in 2008.
  • Both fooled people by making it look like real investing, but there were no real profits.

Companies Invest

  • To accommodate excess cash until it is needed (Businesses can use extra cash to expand, invest in assets, or make low-risk investments like savings accounts, treasury bills, or buying back their own shares).
  • To generate income (Insurance companies profit by investing claim money in stocks and bonds, while other companies often invest in preferred shares for consistent dividend payments).
  • To advance a corporate strategy (A company may buy a competitor to grow, like TD Bank did with Canada Trust, or purchase a supplier for cost savings, like Starbucks with a coffee-roasting plant.)

Investment Advice Scenarios

Chin's Car Down Payment (2000)

  • Chin is risk-averse and wants secure investments.
  • Recommendation: Savings account, as it saves interest.
  • He can take out the money whenever he wants.

Shivi's RESP

  • Parents need 20,000 in 10 years.
  • They are willing to risk a bit for higher returns but need immediate access to the money.
  • Recommendation: Invest in blue chips, mutual funds to diversify safely, and real estate.

Nikki's 18th Birthday Gift (5000)

  • Nikki is willing to take high risks to see how much money she can make.
  • Nikki feels that she is young and is willing to try a few high risk investments just for a run.
  • Recommendation: Penny stocks, as she is willing to do risky investments.