The Basics
What is an investment advisor?
An investment advisor is an individual who is trained and registered with the Investment Industry Regulatory Organization of Canada (IIROC) to provide financial advice and financial products. Different advisors provide different services to match different investor needs. Your advisor should be registered with IIROC, which helps ensure they are an experienced professional that understands your investing needs and the type of investor that you are and is committed to helping you maintain and grow your savings.
You can check to see if your advisor is registered and in good standing with his or her regulatory organization using the Canadian Securities Administrators' (CSA) National Registration Search on the website www.securities-administrators.ca under the "Registration" menu or for advisors in Ontario visit www.osc.gov.on.ca.
You can also run a full background report on the qualifications, employment history and disciplinary record or advisors registered with the Investment Industry Regulatory Organization of Canada by using the IIROC AdvisorReport service at http://www.iiroc.ca/English/Investors/KnowYourAdvisor/Pages/default.aspx.
Stock Market
The stock market or stock exchange provides a venue for investors to buy and sell shares in publicly traded companies. It allows investors a convenient way to find a buyer (or seller) to convert stock to cash (or vice versa). The Toronto Stock Exchange is Canada's largest exchange, for more information visit www.tmx.com
What are some different types of investments?
There are a number of investments that an investor can choose to invest in, such as shares, fixed-income, mutual funds and exchange-traded funds to name a few.
Shares - a piece of ownership of a company that is traded on the stock market. Shares do not give you direct control over the company's daily operations, but it does allow you to get some profit if the company pays dividends.
Fixed-Income Securities (such as bonds and debentures) - investors loan money to companies in return for a commitment from the company to repay the loans, with interest, within specific periods of time.
Mutual Funds - invest in a collection of individual stocks which make up the mutual fund. The fund is actively managed by a professional who will determine which stocks are appropriate based on the fund's goals. The main advantage to investing in a mutual fund is that you can invest in a variety of investments for a low cost and have the fund overseen by a professional.
Exchange-Traded Funds (ETFs) - invest pools of money in a variety of investments, similar to a mutual fund, but trade on a stock exchange, similar to a stock.
What are the risks when I invest?
Most investments involve some form of risk. It is important to understand the different types of risks as well as your comfort with and ability to accept risk. Risks vary, depending on the products you select. The most common risks are:
- Market risk - your investment may drop in value due to unfavourable market developments.
- Credit risk - chance the company you invest in may go bankrupt or may not be able to pay interest or dividends.
- Interest rate risk - changes in interest rate levels which may affect your investments.
- Liquidity risk - if you are not able to sell your investment quickly or for a price close to the price of the last sale in the marketplace.
- Currency risk - investments and income in non-Canadian dollars may lose value because of a change in the exchange rate.
Generally speaking, the potential for higher returns means higher risk. Your advisor will work with you to determine your risk tolerance and create a portfolio that meets your needs.
What does it mean to diversify my portfolio?
Diversification means not putting all your eggs in one basket. By putting your money in different investments and investment types, investors generally reduce their overall risk. You can diversify by type of security (e.g., bonds or stocks), company, industry, maturity, currency or geographic location.
When I receive “hot tips” through the Internet, are these good sources of information?
Stop right there. When you receive "hot tips" through websites, spam e-mails, discussion groups and chat rooms, consider if the sources of information are reliable. Before using online information to make investment decisions, ask yourself: Do I know the person giving advice? What qualifications does he/she have? Is the investment opportunity based on facts? Is there any conflict of interest? Does the person offering the advice have a proven track record of accurate information? Is the person being compensated and by how much? Always use credible and diverse information sources, including a discussion with your investment advisor, to make your investment decisions.
Organizations that all investors need to know about
Canadian Securities Administrators (CSA)
Each province has a securities regulator and together they make up the CSA. The CSA oversees the Canadian capital markets and the advisors who work with you. The CSA strives to protect you, the investor from unfair improper and fraudulent practices while fostering a fair and efficient marketplace. For more information visit, www.securities-administrators.ca.
Investment Regulatory Organization of Canada (IIROC)
IIROC regulates all investment firms and advisors in Canada and is delegated this authority by the provincial securities commission in your province. IIROC's focus is on business and financial compliance and enforcement of rules. IIROC sets high standards to protect investors and strengthen market integrity. For more information visit, www.iiroc.ca.
Canadian Investor Protection Fund (CIPF)
All IIROC registered firms are members of the Canadian Investor Protection Fund (CIPF). Coverage is automatic when your account is with a member of CIPF. If a CIPF member goes bankrupt, coverage can total $1 million (excluding loss on securities due to economic or market changes) depending on the type of accounts held. To find out if your advisor works for a firm covered by CIPF, visit www.cipf.ca
Ombudsman for Banking Services and Investments (OBSI)
OBSI resolves disputes between investment firms and their customers. For more information visit, www.obsi.ca.
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