Asset Classes and Investment Types
1. Cash equivalents and money market
2. Fixed income (bonds, debentures)
3. Equities (common and preferred shares)
4. Alternative investments (derivatives, commodities, real estate)
67. Expected Return
The expected return on the investment product is an important factor for consideration in the investment selection process.
Projected capital appreciation + Projected income from the investment
While achieving high returns is important, returns must be viewed within the context of the risk exposure assumed in order to generate those returns. Exposure to high risk investments may not be appropriate for certain investors, despite the projected returns.
69. Economic Cycle
The stage of the economic cycle is also an important factor for consideration because it will have bearing on the expected return on the investment product. Historically, different asset classes and market sectors perform better depending on the prevailing economic conditions, inflation, monetary policy, and interest rates.
Economic Cycle: Expansion * Peak * Contraction * Trough * Recovery
70. Asset Class and Investment Type
The asset class of an investment product is a key factor for consideration in the investment selection process. The features and characteristics which are distinct to the asset class will determine whether the investment is suitable for a client and will meet the client’s:
Investment objectives + Risk tolerance
Historical studies have shown that certain asset classes, such as cash equivalents and money market investments, provide safer returns than other asset classes, such as equities. Generally, investments with the potential for higher returns will come with higher levels of investment risk.
71. Cash Equivalents and Money Market Investments
1. Money Market Instruments
Short-term debt: Treasury bills, Banker’s acceptances, Corporate paper * Highly liquid * Safety Income * Low Risk
2. Money Market Funds
Investment funds invested in a portfolio of money market instruments * Short term * Highly liquid * Safety Income * Low Risk
3. Guaranteed Investment Certificates (GICs)
Term deposits issued by a financial institution * Principal is guaranteed * Short term * Not liquid * Safety Income * Low to Medium Risk * Low Risk: CDIC1 covered GICs * Medium Risk: Market-linked, Variable rate, Non-CDI
72. Fixed Income Investments
Fixed income investments obligate the issuer to pay the investor interest over the term of the investment and/or the "par" or "face" value at maturity. As the name implies, the primary benefit that fixed income investments provide is the income that they generate for their investors. In addition, some fixed income investments can also provide capital appreciation.
Debt instruments issued by a government or corporation * Obligates the issuer to pay the investor interest over the term of the bond and the "par" or "face" value at maturity * Income * Capital Appreciation * Low to High
Debt instruments issued by a corporation that are not secured by specific assets * Obligates the issuer to pay the investor * Interest over the term of the debenture and the "par" or "face" value at maturity * Can have “convertible” features which convert the debt to equity * Income * Capital Appreciation * Low to High
3. Stripped Bonds
Debt obligations of government and corporate issuers * The interest coupons and principal portion are "stripped" and sold separately * Bought at a discount and mature at par value * The difference between the discount value paid at purchase and the maturity value represents the stripped bond's return, taxed as interest income * Capital Appreciation * Low to Medium
4. Mortgage-Backed Securities
Securitized instruments derived from a pool of residential mortgages * Pay monthly income to investors from the interest and principal payments generated from the mortgages in the pool * Income * Low to Medium
5. Fixed Income Funds
Investment funds invested in a portfolio of income generating investments: bonds, preferred shares * Risk ratings assigned in the prospectus, Fund Facts, ETF Facts * Income * Capital Appreciation * Low-Medium
73. Equities Securities
Shares issued by a corporation to the shareholders of the company. Returns on equities are derived from the profits earned by the corporation, in the form of: Capital appreciation or depreciation in the share’s value; and/or Dividends paid to shareholders
1. Common Shares
Units of ownership in a corporation * Profits and dividends * Publicly listed shares can be highly liquid depending on market capitalization * Capital Appreciation * Medium to High
2. Preferred Shares
A fixed dividend and the right to receive par value in the event of insolvency * Publicly listed shares can generally be liquid depending on the trading volume, but some may have poor liquidity * Income * Medium to High
3. Income Trusts
Trust units, holding interests in the operating assets of a trust (e.g., real estate investment trusts (REITs) and royalty trusts) * Income * Medium to High
4. Rights and Warrants
Carry the right to purchase shares at a set price within a specified time period * Short-Term * Capital Appreciation * High
5. Equity Funds
Investment funds invested in a portfolio of equities * Risk rating assigned in the prospectus, Fund Facts, ETF Facts * Capital Appreciation * Dividend * Income * Medium to High
Common vs Preferred Shares
Common shares are appropriate for investors seeking growth from capital appreciation.
Preferred shares provide the opportunity for dividend income.
Risk and Rank in the Corporate Structure
74. Derivatives and Alternative Investments
Derivatives are contracts which give the holder the right to buy or sell an asset (e.g. financial instrument, commodity, etc.) and the value of the derivative is “derived” from the value of the underlying asset. A pre-determined price and pre-determined time are established for the holder to exercise their right.
Options * Futures contracts * Forward agreements * Foreign currency * Alternative mutual funds and hedge funds
75. Benefits of using a Portfolio Approach
Diversification + Reduced risk
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