Page 10 - A Canuck's Guide to Financial Literacy 2020

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Equities

The majority of people have stocks in their investment portfolio. When you buy a stock,
you’re buying what is known as a share, meaning that you become a part owner in the
business and allowed to vote on matters related to the company. Certain stocks pay out
dividends to those who own shares in the company. Dividends are a way for the company
to share the profits with its owners.

Since 1926, stocks have returned an average rate of 10% annually since 1926. This is a
higher return that you would normally receive from other investment instruments such as
bonds, which are less risky.

Stocks are on the far-right end of the risk/reward spectrum. The more stocks that you’re
holding in your portfolio, the more volatile your portfolio will be. However, you will
experience a higher return long term if you’re buying established, blue chip companies that
have a fairly stable stock price, pay out dividends and are considered relatively safe.

Fixed Income

Bonds, also known as fixed income are a popular way to offset some of the volatility in your
portfolio that stocks bring. When you’re purchasing a bond, you’re lending money to a
corporation, government or a municipal entity. Bonds are safer than stocks and are given a
rating from agencies such as Moody’s, Standard & Poors, etc. Ratings act like a credit
score and bonds with AAA rating are usually considered safe.

When you buy a bond, you’re receiving a guarantee from the particular issuer that you’ll get
your money back plus interest. Be careful that you do not buy junk bonds which are sold by
corporations. Junk bonds also known as high yield bonds are issued by corporations but
they come with higher risk than normal.