Product Definitions

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Description of Different Investment Products

The following provides an overview of the primary types of investments that are available today:

= Growth Investments

= Fixed Income

= Cash

= Tax Incentives

Bonds – fixed income investments that provide semi-annual interest payments that are guaranteed by the issuer. Institutions that issue bonds include all levels of government, government agencies and corporations. They are liquid and trade on a daily basis. They are guaranteed by the credit worthiness of the issuing institution. The riskier the institution, the higher the yield on the bond will be. Category:

Common Stocks – ownership in a company with option to buy stocks in markets worldwide including Canada and the USA. There are large capitalized companies, some national some international; mid-size companies; junior and start-ups. The smaller the company, generally there is greater risk, with greater upside. Category:

Debentures – bonds that are issued by corporations and tend to be higher risk than bonds. Many bonds have guarantees attached to them such as backed by real estate of the company. Debentures do not provide any collateral like these bonds. Yields tend to be higher on these investments to offset the higher risk. They are liquid and trade on a daily basis. Category:

Exchange Traded Funds (ETF’s) – where you can buy specific markets, sectors of the markets, commodities, precious metals etc., and performance is based on how the underlying sector performs. Management fees are generally less than 1% with many around .50 of 1%. Category:

Flow Through Shares (FTS) – Some corporations in the mining, oil and gas, and renewable energy and energy conservation sectors may issue FTS’s to help finance their exploration and project development activities. The FTS’s must be newly issued shares that have the attributes generally attached to common shares. They are more aggressive investments but have tax advantages to the investors. This is a way for junior resource corporations to raise capital as it may be difficult the traditional manner. Moreover, many are in a non-taxable position and do not need to deduct their resource expenses. The FTS mechanism allows the issuer corporation to transfer the resource expenses to the investor. A junior resource corporation, in particular, benefits greatly from FTS financing and the investor gets good tax advantages. The challenge with these investments has historically been the underlying value of the company. Many provide little residual value and are worth little beyond the required holding period. The FTS program provides tax incentives to investors who acquire FTSs by allowing:

  • Deductions for resource expenses created by eligible corporations
  • Investment tax credits for individuals (excluding trusts) on resource expenses in the mining sector that qualify as flow-through mining expenditures.

Category:

Forex – ability for an investor to invest in different world currencies. Generally most currencies worldwide trade relative to another currency or a basket of currencies. Many times when a currency is quoted, it is in relation to the US dollar as it is the world reserve currency. Foreign Exchange is a very large an liquid market. It would be considered for more sophisticated and educated investors. Category:

Futures – an investor can purchase the future price of an index, different commodities, currencies, precious metal etc. They trade through futures exchanges. These are leveraged investments that provide high return and risk. Some use futures market to hedge, others use them to speculate. Category:

Guaranteed Investment Certificates (GIC’s) – this is a conservative investment that offers a guaranteed interest return over a specific period. Interest is usually paid annually or compounded. They are generally issued by banks and other financial institutions. These investments are illiquid although in emergency situations they can be sold at discounted prices. In Canada these investments are guaranteed up to $100,000 per institution (total of all fixed income holdings) by Canada Deposit Insurance Corp (CDIC). Category:

Hedge Funds – many ways a money manager can invest in a hedge fund including buying and selling stocks; utilization of derivatives; arbitrage etc. These type investments are generally used for investors with larger capital and would be considered higher risk by the general market. Category:

Income Trusts – A corporate structure that is designated by the Canada Revenue Agency and operates as a profit-driven corporation. This type of company pays out all earnings to unit holders before paying taxes, and is usually traded publicly on a securities exchange. In 2011 all Canadian income trusts lost their special corporate tax privileges, and were required to be converted into traditional corporate structures. This made these structures less attractive and now can be analyzed like other common shares. Category:

Master Limited Partnership (MLP) – An investment that is publicly traded and a form of a limited partnership. There are two types of partners in this type of partnership, one being the limited partner or the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP’s cash flow. The second partner is the general partner. This is the party responsible for managing the MLP’s affairs and receives compensation that is linked to the performance of the venture. These tend to be more aggressive growth investments in general. Category:

Mutual Funds – An investment structure that is made up of a pool of funds from many investors. The purpose is to invest in a diverse portfolio of securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus. There are numerous categories of mutual funds which allows investors to diversify to numerous investment categories. Fees are significantly higher than ETF’s so the goal is to outperform the underlying markets they are investing in. This is their value added proposition. Category:

Options – where an investor can buy contracts guaranteeing their ability to buy or sell a security at a specific price on a specified date in the future. There are both short-term (less than 3 months) and long term options (up to 2 years), where you pay an intrinsic price for the options as well as time value (longer the term, the more the time value cost). These are leveraged investments that possess higher risk and rewards to investors. Category:

Precious Metals – the two primary precious metals are gold and silver. They are considered hedges against a number of world and economic events. These include:

  • High level of inflation
  • Environment where sever recession or deflationary conditions persist
  • Little faith in world currencies as they are fiat based – backed only by credit worthiness of the country that issues them.
  • Gold is considered the ultimate currency as it has survived throughout history. Throughout many periods, gold backed paper currencies but that was taken away in the 1970’s

There has been a major shift towards precious metals over the last decade by investors, institutions and many Central Banks. Category:

Preferred Shares – A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights. Dividends in Canada have significant tax advantages over interest income. The structure of preferred stock is specific to each corporation. However, the best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential appreciation). Category:

Stripped Bonds – investments that are most used for investors registered retirement savings plans (RRSP’s). They are basically where a bond is separated from its interest coupons over the term of the bond. The residual bond and coupons are discounted in price so that the investments can be sold at a discounted price to their face value. They will have a guaranteed future value and a compounded annual rate of return. Category:

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