Choosing the right products for your portfolio

Discover the different investment products offered at Questrade.

Bonds stocks ETFs basket to your portfolio GIF

 

Choosing the right investments to build a portfolio can be an intimidating task especially if you haven’t invested before. Typically, some investors start this by determining their risk level, investment goals, and expected investment return. The answers here will vary from person to person and can change as well over time. After determining these, understanding common asset classes such as equity based investments and fixed-income based investments and their types, may give you an idea of the different investment types you can use to build a portfolio.

Let’s take a look at each asset class below (and their types) and other forms of investments that are available out there.

Please note that before selecting any investments, it’s generally a good practice to plan the right asset allocation that suits your situation and how you’re going to diversify your portfolio ahead of time.

Please note: The information prepared in this section is for educational purposes only, and should not be taken as any form of trading or investment advice.

When talking about equity-based investments (or simply equity investments), you can think about money invested in a company by purchasing a portion of that company in the stock market. You get a return on investment by trading it in the market or receiving cash payments (or dividends). Since most equity investments are traded in the stock market, they are typically more prone to market volatility. On the other hand, they may have a higher potential for return on investment.

Stocks

Stocks

A stock (or a “share”) is a type of investment that represents partial ownership of a company. When you buy a stock, you’re essentially buying a portion of a company and aiming to grow your investment as the company grows. As a company grows and its share value increases, stockholders may choose to sell the stock and lock in capital gains (once it’s sold). Investors may also receive dividend payments, depending on the stocks they own.

There are two types of stock, common and preferred. Their differences vary but typically common stocks give voting privileges to stockholders while preferred stocks do not. Preferred stocks have lower market volatility and usually pay higher dividends while common stocks have higher market volatility and higher capital gains potential.

IPO

IPO

Before a stock is available for trading in the stock market, it undergoes a process called Initial Public Offering (or simply IPO) where private companies raise capital and go public for the first time. Some investors may invest in companies undergoing an IPO because they are long-term followers of the brand or want to purchase securities at the IPO price (or offering price). After an IPO, stocks become available in the open market for trading. In some cases, some companies offer a Direct Public Offering (or DPO) that directly offers securities to the public to raise capital. This process removes other intermediaries such as banks and venture capital funding which lowers the capital raised in DPOs.

Fixed-income based investments (or simply fixed-income investments) are investment products where you “lend” money to an institution (typically government and corporation). In return, you get paid a variable or fixed interest (called a coupon payment) on regular intervals over a pre-determined term. In addition, when the term reaches maturity, the issuer of the investments pays you back the principal (or the original investment amount). Since a fixed-income payment structure is fixed and predictable, it is typically less volatile and has lower risk.

Bonds

Bonds

A bond is a debt security where investors lend money to institutions like governments, corporations, municipalities, or other entities for a pre-determined term. Typically, a bond includes a maturity date when the principal loan is due. Until then, the issuers pay the creditors (or the investor) a coupon rate on regular intervals. Bonds are rated by their credit rating to see their trustworthiness or reliability in paying back the coupon rate to the creditors. The higher the credit rating is, the less likely the issuer will default on their payments (and vice versa).

Guaranteed Investment Certificate (GIC)

GIC icon

Guaranteed Investment Certificates or GICs are investment contracts that allow you to deposit money to an account for a period of time (typically a few months to 5 years) and in return, earn interest. Similar to bonds, GICs let you lend your money to institutions (typically banks or trust companies) and they provide guaranteed interest returns to the deposited money. You can take out the money you invested from the account (except for non-cashable GICs), however, you may have to pay penalties depending on the type of GIC you hold. Generally, issuers pay a higher coupon rate when the GIC term is longer.

There are other forms of investments that can be a choice for some investors who may want diversification. Others, however, may have more investing experience and may want to try financial contracts (often called derivatives) with a value based on the underlying asset. Each investment will behave differently and can be an option for an investor depending on their profile. Let’s take a look at each of them.

ETFs

ETFs

An ETF (or Exchange-Traded Fund) is an investment that contains an underlying basket of securities such as stocks, bonds, commodities, and other types of investments. Typically, an ETF follows a particular sector, index, or type of assets and can be traded on the stock exchange, similar to a stock. When you buy an ETF, you’re participating in the gains and losses on the underlying securities inside that fund. If the underlying securities increase in value, your shares will typically increase in value too and you may realize a capital gain (once it's sold). In contrast, if securities inside the fund decrease, the value of your share will also decrease and you may incur losses. Since an ETF can contain multiple assets, investors can see it as an option to diversify their portfolio.

Mutual funds

Mutual funds

A mutual fund is an investment product that pools money from investors in order to trade a basket of securities such as stocks, bonds, and other types of investments. When you buy a mutual fund, a portfolio manager allocates and manages assets in the fund according to its objectives (typically found in the fund’s prospectus, a formal document that is filed and approved before an investment becomes public). Similar to ETFs, investors can see mutual funds as an option to diversify while having a professionally managed portfolio.

Options

Options

An option is a financial contract between a buyer and seller. The buyer of an option contract gains the rights, but not the obligation, to buy or sell the underlying asset at a pre-determined date and price. On the other hand, the seller of the option is obligated to carry out the terms of the contract and complete the transaction if the buyer chooses to exercise their option to purchase. An option contract will have a stated expiration date where holders can exercise their option prior and a price of the option (called the strike price).

Foreign Exchange (FX) and Contract for difference (CFD)

FX and CFD

Foreign exchange (or FX) trading is the buying and selling of currencies with the intention of making a profit from the price differences on the currencies involved. Investors can trade foreign exchange in a decentralized electronic exchange that runs 24 hours, 5 days a week (from 5 PM EST Sunday to 4 PM EST Friday) Monday-Friday) and is the largest financial market in the world. Because of this, investors can have the opportunity to trade at their convenience from a global financial market.

A contract for difference (or CFD ) is an investment contract where the buyer speculates a price of a security (stocks, commodities, currencies, etc.) and agrees to pay the seller the price difference based on the current price of the security (or when the contract opens) to the price when the contract closes. When you buy a CFD, you don't own the asset but rather gain earnings based on the price difference of the security.

Precious metals

Precious metals icon

You can also trade precious metals such as gold and silver to diversify your portfolio of commodities investments. Commodities are a type of asset class based on raw materials (usually from natural resources and agricultural produce) used to typically create products that consumers buy.

Questwealth portfolios are diversified low-fee ETF portfolios designed by experts to help you achieve your financial goals faster. Answer a few questions about your investment goals and risk profile. You'll be matched with a portfolio designed to get you there. Your portfolio is actively managed by experts who watch the market and adjust your portfolio when needed. Using research, the portfolio managers aim to limit losses and are always looking for opportunities to improve your returns.

On the other hand, if you are looking to try trading investments yourself, you can use our free practice accounts for 90 days. Our practice accounts allow you to explore our platform and give you more confidence in trading equities (stocks, ETFs, options) and FX and CFDs.

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