How to invest your money
This article will help you understand how to invest your money on your own, learn about the different investment accounts, and types of investments.
What's the first thing that comes to mind when you think about how to invest?
- Is it excitement about discovering a stock you believe could be profitable?
- Is it hesitation about how to get started in investing?
- Is it confidence about the success you've enjoyed in other areas of your life, making you eager to tackle something new?
Learning how to invest can mean different things to different people. It can involve your own unlimited possibilities and may trigger some dreams you didn't even realize you had. When you're in charge of your investments, you may be motivated by what you can learn and potentially achieve on your own terms.
Why invest your money?
Whether you're saving for retirement, a house, education or just saving for the future, investing may help your money grow. If you keep your money in a savings account, it may not earn enough interest to keep up with inflation over time.
Knowing some investing basics helps to lay the groundwork so you can set your financial goals and decide what types of investments may help you reach them.
Do-it-yourself (DIY) investing refers to an investing approach where you can manage your investment portfolio yourself through sophisticated trading platforms or a simplified, goals-based app.
Here are some reasons why someone may consider managing their investments independently as a self-directed investor:
- Potentially lower fees.
- Freedom to make investment decisions on your own time.
- Greater control over your money's growth.
- Flexibility to choose from a larger pool of investment vehicles.
Other factors to also consider include, level of investment knowledge, how much one can devote to DIY investing and risk tolerance level.
There are extensive educational resources, tools, market information and research, and insights available which may help you.
Plan before you invest
Planning your time frame, risk level, investment objectives, and account types can help make your personal investment journey go a lot smoother. Before you look at the types of investments, ask yourself these questions:
- How long will you invest?
Determining your time horizon depends on your financial goals and how long you will invest before you need the money. When you invest funds for the long term such as for a retirement goal, you may consider reinvesting your returns to help provide compounded growth each year – potentially making your money grow faster.
- How much risk can you take?
Your risk tolerance can be defined as conservative, moderate, or aggressive. Your tolerance can determine which types of investments you choose. For example, if you have a short-term goal, you may consider lower-risk investments (a conservative approach). For long-term goals, your tolerance for market volatility could be higher (an aggressive approach).
- What is your objective?
You should have a clear objective in mind before you start making investing decisions. Consider your lifestyle and the fact that your objectives will likely change over time. For example, today your objective may be to put X dollars in your Registered Retirement Savings Plan (RRSP) or save for a particular purchase. Then life happens, priorities change, and your objectives can change too.
- What account types are suitable for your different needs?
Once you've established your financial goals, you can select different account types to suit the goals that you're saving for.
Which investment account is best for me?
Opening the right investment account can help towards attaining your financial goals. Here are some highlights of different accounts:
- RRSPs (Registered Retirement Savings Plan) are typically used to save for retirement. Contributing to an RRSP can allow you to defer taxes on the returns you earn on the investments in the plan and to access the funds in retirement years when you may potentially be in a lower income tax bracket.
- A Tax-Free Savings Account (TFSA) can be used to save for short- or long-term goals because it lets your savings grow tax-free. A TFSA can be used to save for various types of goals, like an upcoming vacation or large purchase.
- Margin accounts1 can help you boost your buying power by leveraging value in your portfolio. You can borrow against value in the securities you already own to make additional investments and access sophisticated investment strategies, including option trades 2 and short selling. However, leveraged trades are not for everyone. Along with the potential for greater returns, comes the flip side of increased exposure and risk.
- A cash account could be used to save for a variety of goals, can provide flexibility to easily access available cash in the account and you can trade a variety of securities on North American markets.
TD Direct Investing has many account types geared to different situations, including the RESP, RIF, LIRA, LIF and RDSP. Below is a brief description of four popular account types.
The purpose of a Registered Retirement Savings Plan (RRSP) is to invest and grow your money on a tax-deferred basis until you retire and need to withdraw it to fund your retirement. No later than the end of the year you turn 71, you must convert an RRSP to a permitted form of retirement income, such as a Registered retirement Income Fund (RRIF) or an annuity or take the funds in cash. Since your income may be lower at this point in your life, you may be in a lower tax bracket when compared to your prime earning years. With an RRSP account you can:
- Claim your RRSP contributions as r deductions from income on your annual tax return.
- Let your investments potentially grow within your RRSP without paying any income tax on the investment returns or on the growth until you withdraw funds.
An RRSP account is designed for growing savings for your retirement, but under the Home Buyers’ Plan or Lifelong Learning Plan, you may be able to access your RRSP funds on a tax-free basis to help pay for your first-time home purchase or for education programs, subject to eligibility and conditions, including repayment requirements.
When you invest money in a Tax-Free Savings Account (TFSA), you don’t pay tax on any investment returns. When you withdraw money from a TFSA, you don't pay tax on the withdrawal.
You can contribute funds each year in accordance with the contribution limit defined by the federal government. The TFSA contribution limit for 2021 is $6,000. If you withdraw money from the TFSA, you can re-contribute amounts withdrawn. Note that withdrawn amounts are added to your contribution room only at the beginning of the following calendar year.
RRSP vs. TFSA – which account should you choose?
Whether you're saving for retirement, home ownership or education, both RRSPs and TFSAs can be an option. When you're evaluating whether an RRSP or TFSA is the right account to house some of your DIY investments, being able to determine your income needs can help you make that choice.
- An RRSP is a tax-deferred savings vehicle. Financial institutions withhold a prescribed rate of tax at the time of a withdrawal; ultimately the amount withdrawn will be taxed as income at your marginal rate. If you know you'll have less income after retirement, the tax you will pay will likely be less than what you'd pay while earning the income.
- With a TFSA, you invest with after-tax dollars and your investments can grow tax-free. This means you don't have to pay tax on any growth and you’re not taxed on withdrawals.
See a comparison of TFSA vs RRSP account features.
A cash account is an investment account where all investments must be purchased using your own cash, with no borrowing. With this type of account, you can get started investing in stocks, mutual funds, fixed income and ETFs right away.
In a cash account, all purchases must be paid in full.
In a margin account, you may pay for a percentage of a stock's value, for example 30%, while borrowing the balance of the funds from your broker. This can allow you to increase your buying power to purchase more shares. Think of it as being able to buy a bigger house with a larger mortgage loan. Trading on margin does bring higher risk, so it is critical that you spend time learning about all the risks and account characteristics before considering opening a margin account.
What can you invest in?
Selecting your investments goes hand in hand with your account type and your appetite for risk. Many investors diversify their investments across different asset classes to help maintain a balanced portfolio.
Note that registered plans such as RRSPs and TFSAs are restricted to holding the types of investments which are considered qualified for such plans.
As well, if you plan to hold foreign securities within a registered plan, consult your tax advisor as there may be potential tax implications.
Stocks or Equities
When you buy stocks, you own part of a company and can benefit from its potential profits in either increased stock value or in dividends paid by the company or a combination of both. In some cases, you also get the right to vote on various company matters.
Exchange Traded Funds (ETFs)
Exchange Traded Funds, or ETFs, are a grouping of securities that trade on a stock exchange like a stock does.
- ETFs hold many different assets within them, not just one stock which may make it easier for you to stretch your dollar when compared to buying individual stocks.
- ETFs can be bought and sold throughout the day on the market and so their prices can change; in contrast, mutual funds are only priced once a day at the close of the markets.
- Some ETFs track an index that emphasizes holding investments that pay dividends. These dividend ETFs are designed to provide investors with a regular income stream.
A mutual fund is similar to an ETF in that it is also a collection of different investments, exposing you to many different companies or asset classes with just one transaction. Investments within mutual funds are often grouped together by industry or other similarity.
The difference between mutual funds and ETFs is that ETFs trade on stock exchanges and can be bought and sold any time during the trading day while mutual funds are transacted at the end of the trading day.
Fixed Income Securities
Fixed income securities provide a fixed-rate return and include government and corporate bonds. They are flexible and can be sold at market value if you need to cash them.
As a self-directed investor you can buy and sell government and corporate bonds including:
- Government of Canada bonds
- Government agency bonds
- Provincial and Municipal bonds
- Investment Grade Corporate bonds
- Strips (Zero Coupon) and Residual Bonds
- U.S. Pay Bonds
Other fixed income choices are GICs, mortgage-backed securities, and money market instruments.
When you invest in Guaranteed Investment Certificates (GICs), you are lending your money to a financial institution for a certain rate of return, over a designated period of time.
A GIC gives you back 100% of your investment plus interest that's determined at the interest rate set for your GIC at the time of purchase.
Options2 give you the right to buy (a "call option") or sell (a "put option") a security at a fixed price during a designated time period, designed to help you to leverage a stock's changing value and help protect you against drops in the market.
IPOs and New Issues
An IPO, which stands for Initial Public Offering, occurs when the shares or stocks of a private company are made available to the public, for purchase, for the first time. New issues refer to any security that a company offers to the public for the first time, including IPOs, secondary or treasury offerings.
There can be new issues after an IPO, but only one IPO occurs when a private company decides to go public.
Balancing your online investment portfolio mix
To help protect your investments from risk, you can potentially balance your portfolio by diversifying investments across different asset classes. Some different asset classes are:
- stocks or equities
- bonds and fixed income
- cash equivalents and money market
The importance of a personal investment plan
A personal investment plan can help you lay out your finances and understand the timeline you'll need to achieve your goals. You can create a plan and adjust it over time as your lifestyle and circumstances change.
It's time to start your online investing journey!
Now that you know a few basics about how to invest, you can feel confident about taking the next step.
At TD Direct Investing, we can help you achieve your investing goals with trading platforms for a variety of trades using a range of investment types:
TD Direct Investing has many investing resources to help you build confidence in managing your own investments.
An Initial Public Offering, or IPO, is a private company's first offering of new stock to the investing public. Learn what an IPO is, how it works, how to find new IPOs online, and more.