Investments Notes

Unit 4 - Investments
General Learning Outcome:
Demonstrate an awareness of and recognize the differences
concerning different types of financial investments.
Specific Learning Outcomes
• Explain how financial values and goals affect investment
choices.
• Describe different investment options; e.g., GICs, bonds,
mutual funds, stocks, and real estate.
• Compare and contrast different investment options in terms
of risk, rates of return, costs, liquidity, and lengths of term.
• Identify reasons for investing money in registered savings
plans (RSPs).
• Describe the purchasing and selling of stocks.
• Adjust financial plans, including budgets, to achieve
personal goals.
• Interpret Net Worth Statements.

Introduction
• One area of your life you can work at
controlling is your financial life. In order for
you to be in control of your financial life,
you have to have financial goals.
Your financial goals are based on your
personal goals, which in turn are based on
your personal values. If you are able to set
financial goals at a young age, you are
more likely to be in control of your
financial life in the future.

Goals and Your Life Cycle
• A goal can be defined as a future
condition you would like.
• Your goals are based on your
values.
• Your goals will change with your
age.

Goals and Your Life Cycle

Investing in the Stock Market
• Shares of stock in a company
represent the company’s ownership.
When you purchase shares in a
company, you become a part owner
of that company.
• You can purchase shares in many
major Canadian companies. Some
companies have only a few shares
and a few owners, while others have
millions of shares and hundreds of
thousands of owners.

Investing in the Stock Market
• Shares of publicly traded companies are bought
and sold on various stock exchanges. A stock
exchange is an organized marketplace for buying
and selling shares of stock. The largest Canadian
stock exchange is the Toronto Stock Exchange
(TSX).
• The Toronto Stock Exchange was incorporated in
1878 with less than 12 companies. Today the
Toronto Stock Exchange trades shares of stock
of over 1200 Canadian- owned companies. In
order for a company to be listed on the Toronto
Stock Exchange, it must have at least one million
freely traded shares that are worth at least
$2,000,000 in total. These shares must be held
by at least 300 stockholders.

Textbook
Assignment
Page 186
Q. 1 - 7

Investment Choices
• Equity Investments
– Stocks
– Equity Mutual Funds
– Real Estate
– Collectibles
• Debt Investments
– Savings Accounts
– Term Deposits & GIC
– Bonds
– CSB
– Treasury Bills
– Mortgages
– Debt Mutual Funds
– Insurance

Equity Investments - STOCKS
• When you purchase shares of stock in a company,
you are purchasing a part ownership in the
company. If the company does well, the value of
your shares should increase and this increase is
called a capital gain. If you were to sell your stocks
at this time, you will have made money on your
investment.
• If the company does poorly, the value of your
shares should decrease and you have a capital
loss. If you were to sell your stocks at this time, you
will have lost money on your investment.
• Capital gains are taxed differently than interest
income. There are tax advantages to earning
capital income compared to earning interest
income.

Equity Investments - STOCKS
• In addition, a company distributes a portion of its
profit, called dividends, to its shareholders.
Although you can make a lot of money by
investing in the stock market, you can also lose a
lot.
• There are no guarantees when you invest in the
stock market. Selecting stocks also requires
knowledge, time, and effort.

Equity Investments – Mutual Funds
• When you invest in a mutual fund, your money is
pooled together with the money of other investors who
have invested in the same mutual fund. You
automatically have the services of a professional
money manager who invests the pooled money. Each
mutual fund has a different objective and determines
the types of securities the mutual fund manager will
invest in.
• A mutual fund provides you with an opportunity to
invest in the stock market or another venture without
the responsibility of making specific investments. You
purchase a mutual fund in units. If the unit price
increases, you earn a capital gain. If the unit price
decreases, you have a capital loss. A mutual fund
investing in equities is not risk-free and its value will
rise and fall together with the equities in the fund.

Equity Investments – Mutual Funds
• Mutual funds that invest in stocks are
equity investments. However, not all
mutual funds invest in equities. Some
mutual funds invest in debt instruments,
and are included in the category of debt
investments.

Equity Investments – other
• Real Estate
When you invest in real estate, you invest in property
of a permanent nature; for example, land and
buildings. For most people, investing in real estate
means buying a home of their own. However, some
people buy property as an investment and to earn
rental income.
• Collectibles such as paintings, jewelry, and
antique cars
Collectibles include not only paintings, jewelry and
antique cars, but items like coins, stamps, sports
cards, and comic books. When you invest in a
collectible, you expect its value to increase so that it
can be sold at a price higher than its buying price.

Debt Investments
• When you purchase a debt investment,
you are lending money to a borrower. A
borrower requires money for a venture
and pays you interest for its use. You do
not become a part owner in the venture.
Some examples of debt investments are
the following:

Debt Investments
• Some examples of debt investments are the
following:
• Savings accounts
When you place your money in a savings account,
you are lending money to a financial institution.
Financial institutions offer you a variety of savings
accounts. You should compare the different types
of accounts in terms of interest rate, service
charges, minimum balance required, and any
service packages.
Money invested in a savings account is guaranteed
by the Canada Deposit Insurance Corporation
(CDIC). The Canada Deposit Insurance
Corporation guarantees savings account

Debt Investments
• Term deposits (30 days – 1 year)
When you place your money in a term deposit
with a financial institution, you are promising to
leave your money untouched for the length of the
term. The advantage is that a term deposit will
generally pay a higher rate of interest than a
savings account. The disadvantage is that you
cannot access your money until the term is up.
The Canada Deposit Insurance Corporation
(CDIC) also guarantees money invested in term
deposits and Guaranteed Interest Certificates.

Debt Investments
• Guaranteed Interest Certificates (1 year – 5
years)
Money invested in a term deposit or a
Guaranteed Interest Certificate (GIC) has a
guaranteed interest rate. The money is usually
locked in until its maturity date (length of the
investment). Minimum deposits may be required.
The Canada Deposit Insurance Corporation
(CDIC) also guarantees money invested in term
deposits and Guaranteed Interest Certificates.

Debt Investments
• Bonds
Bonds are a long-term debt security. They are
issued by the federal, provincial, and municipal
governments as well as by corporations.
When you purchase a bond, you receive a
certificate that states the terms of the issue and
the face value of the bond (its value at maturity),
its maturity date, and its interest rate.
Although a bond may fluctuate in value, the value
of the bond at maturity is guaranteed. Bonds are
bought and sold on the bond market through a
stockbroker.

Debt Investments
• Canada Savings Bonds
Canada Savings Bonds are bonds issued by the
Government of Canada. You purchase them in
denominations of $100 to $10,000. The Canadian
government guarantees the interest rate of the
Canada Savings Bonds for at least a year. This
interest rate is slightly higher than that of a regular
savings account.
Canada Savings Bonds differ from other bonds in that
they are not bought and sold on the bond market but
can be purchased at financial institutions. Canada
Savings Bonds have been a popular investment for
Canadians. Not only are they a very secure
investment, but they can be redeemed at face value
before their maturity date.

Debt Investments
• Treasury bills
When you purchase a treasury bill, you are
purchasing a short-term government debt. A
treasury bill does not pay interest but is sold at a
discount and matures at its face value or par. The
difference between the purchase price and its
face value is your income.
• Debt Mutual funds
These include those mutual funds that invest in
debt investments, for example, bond mutual
funds and mortgage mutual funds.

Debt Investments
• Insurance
Some types of life insurance have a built-in
investment component. You can use these types
of life insurance as investment vehicles.
• Mortgages
A mortgage is usually financed by a bank, trust
company, or credit union. However, it can also be
financed by an individual.
An individual who finances a mortgage lends
money to someone who wishes to purchase land
or a building (such as a house). The borrower is
legally required to pay back this money at a
certain interest rate over a certain period of time.

Evaluating an Investment
• Each equity and debt investment can be
evaluated in terms of the following
characteristics:
• Return or yield
• Liquidity
• Risk
• Inflation risk

• Return or yield is a comparison of how much the
investment earns compared to the amount of the
investment. The return of an investment is usually
expressed as a percent.
• Liquidity refers to the ability of an investment to
be quickly turned into cash. Investments that can
be quickly turned into cash include savings
accounts, treasury bills, and Canada Savings
Bonds.
• Risk refers to the probability of losing all or part
of an investment in the future. Investments vary in
terms of their risk. In general, the greater the risk,
the greater the yield.
• Inflation risk refers to the probability an
investment will lose purchasing power.

• For example:
• Suppose you have an investment that has
increased 3%, but inflation is more than 3%.
The amount you can purchase with your
investment has actually decreased in value.
Therefore, this investment has not kept pace
with inflation.

Choosing an Investment
• Your choice of investment will vary
depending upon your age, financial situation,
financial knowledge, and the level of your risk
tolerance.

Choosing an Investment
• The following is a suggested Portfolio Asset
Allocation Mix Chart based on your age.
This chart is intended only as a general guide.
In order for an individual to decide on an
asset allocation mix, the other factors of
financial situation, financial knowledge, and
level of risk tolerance have to be considered.

Worksheet
Assignment
Q. 1 - 10

Budgeting
• Preparing a budget is one of the best ways to
reach your financial goals. A budget allows
you to compare your income with your
expenses. It allows you to see where your
income is coming from and how you are
spending it.
A budget can help you:
– live within your income
– identify financial priorities
– allocate funds to meet expenses
– meet financial emergencies and reduce credit use
– reduce uncertainty and conflict about affairs
– gain a sense of financial independence and control
– save and invest to reach financial goals

Budgeting – Paying Yourself First
• One of the most important suggestions made by
financial planners is ‘paying yourself first.’ By this,
financial planners mean that you should set aside a
certain percentage of your net income as soon as you
receive it and live off the remaining amount. Paying
yourself first will provide you with financial security.
• Most people know it is important not to spend all the
money they earn, but to save some of it. ‘Paying
yourself first’ involves saving money but with a twist.
Rather than spend and save what is remaining, you
set aside a fixed amount to save first and then spend
the remaining amount. Most financial planners
recommend that you set aside 10% of your net
income. They also suggest you begin the habit of
paying yourself first as soon as you start earning
money.

Budgeting – Recommended Spending Levels
• The recommended levels of spending in the various
categories of a budget differ by the subject’s age, income,
and family situation. The following table of recommended
levels of spending provides a general guideline only.

Preparing a Budget
• The budget template you will be using is divided
into the following five sections.
Section 1: Net income
Section 2: Expenses - Monthly Expenses
Section 3: Expenses - Annual Expenses
Section 4: Reserve Fund and Savings
Section 5: Summary

Preparing a Budget

Section 1: Net income
• Your first step in preparing a monthly budget is to
accurately estimate your annual income. The category for
net income is subdivided into three parts: regular net
annual income, additional net annual income, and other net
annual income.
Regular net annual income is that of the major income
earner. Additional net annual income includes that of other
family members. Other net annual income includes income
such as scholarships, bonuses, tips and gratuities, income
tax refunds, child tax credits, and inheritances.
Note: Annual income in the budget form is net income and
not gross income. This means that it is the income you
receive after all deductions such as Canada Pension Plan
contributions, Employment Insurance premiums, and
income tax have been deducted.

Section 2: Monthly Expenses
• This section consists of expenses that are paid each
month. Some of these may be fixed expenses such as a
mortgage or car payment. Some of these may be variable
expenses such as groceries, clothing, and car
maintenance.
Section 3: Annual Expenses
• This section consists of annual expenses. Although you
pay annual expenses only once a year, you should budget
for them each month. You are then prepared for them when
you have to pay them.
Note that this calculation is completed by dividing an
annual expense by 12 to calculate the average monthly
contribution.

Section 4: Reserve Fund & Savings
• Many financial planners suggest that individuals should set
aside money in a reserve fund for emergencies. The
suggested amount is equal to two month’s net income.
Apart from this emergency reserve fund, individuals should
‘pay themselves first’ by saving approximately 10% of
total net monthly income.
Section 5: Summary
• In this section, the total of all expenses, reserve fund and
savings is subtracted from the total net monthly income. The
calculation will result in a surplus (income exceeds
expenses) or a deficit (expenses exceed income – shown in
red on the spreadsheet).

Preparing A Budget
Exercise
Q. 1 - 7

Net Worth
• A net worth statement is a
‘snapshot’ of your financial
situation at a given time.
It is the difference between what
you own, your assets, and what
you owe, your liabilities.
Your net worth statement is the
best overall indicator of your
financial worth.

Net Worth
• In a net worth statement, your
assets can be divided into the
following three categories:
–Liquid Assets
–Semi-Liquid Assets
–Non-liquid assets

Net Worth
• Your liabilities in a net worth
statement can be divided into the
following two categories:
–Short-term debts
–Long-term debts

Net Worth – Debt/Equity Ratio
• One of the most important ratios used to
analyze a net worth statement is the
debt/equity ratio. The debt/equity ratio of
a net worth statement compares all debt,
excluding the mortgage on a principal
residence, to the equity or net worth. This
ratio is expressed as a percentage and is
a measure of an individual’s debt burden.
The debt/equity ratio is calculated using
the following formula:

Net Worth – Debt/Equity Ratio
• Most financial advisors suggest that
the debt/equity ratio should not
exceed 50%.
If the debt/equity ratio is greater than
50%, it indicates an individual’s debt
burden is too high. The individual
should then consider ways to reduce
this debt.

Sample Problem:
Completing a Net Worth Statement
• Olivia Jones has $670 in her chequing account
and $1500 in a savings account. Her life
insurance policy has a $5000 cash surrender
value.
She has $6000 invested in mutual funds and
$35,000 in a registered pension plan.
Her home is valued at $85,000 on which she has
an outstanding mortgage of $62,000.
Her car is valued at $18,000. She has a car loan
of $8000 that must be repaid within two years.
The balance owing on her credit cards is $495.

Net Worth Statement

Sample Problem:
Completing a Net Worth Statement - Solution
Olivia has a net
worth of $80,675
and a debt/equity
ratio of
approximately
10.53%.
Since her
debt/equity ratio is
well below 50%, her
debt burden is quite
manageable.

Investments Notes

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