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Highlights
- A mutual fund is a type of an investment instrument that creates a pool of funds from many investors and then invests those funds in various securities.
- A dividend is a part of profit the firm choses to give out to its shareholders.
- A Registered Retirement Savings Plan (RRSP) is registered with the federal government in Canada.
When you make an investing plan, several questions arise in your mind like which stocks should you invest in? This article should help newbie investors to make some investment decisions.
What are mutual funds?
A mutual fund is a type of an investment instrument that creates a pool of funds from many investors and then invests those funds in different securities, including bonds, stocks, money market instruments, and other funds. Professional money managers manage the mutual funds for investors and try to develop capital gains or returns for them. They are responsible for researching on behalf of the investors and deciding on which security they should invest in.
The investors who invest in mutual funds represent a part of the ownership in the fund. Mutual funds are of different types, including debt funds, hybrid funds, growth funds, income funds, and equity funds.
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Also read: Mutual Fund or ETF? Which is a better option for you?
What is a common share?
A common share is a security denoting partial ownership of a firm. It is the most common type of stock in which one can invest.
Common shareholders can get some voting rights and can participate in certain company’s issues, such as electing the board of directors, policy changes, and voting on some corporate matters.
What is a dividend?
A dividend is a part of the profit a firm chooses to give out to its shareholders in various forms, including cash payment, stocks, and others. A dividend represents how a company divides its earnings among shareholders.
Dividends are payments that are generally provided proportional to the amount of stock held by the shareholder. So, when a company decides to share dividends then a shareholder is liable to get dividend payments on each share that he holds in the company. An organization’s board of directors decides on the distribution of dividends. It should also be approved by shareholders.
A company doesn't need to distribute dividends as it is not compulsory. That’s why many companies don’t share dividends as they prefer to invest the profits back into the company. There are different types of dividends including cash dividends, special dividends, preferred dividends, and stock dividends.
Also read: 5 top monthly dividend stocks to buy in Canada
What is an ETF?
An exchange-traded fund or ETF is a collection of investments that trade on the stock exchange. ETFs allow the investors to invest in various securities at one time. In comparison to other types of funds, ETFs have lower fees.
A professional money manager operates the ETFs. It collects funds from investors and invests that fund in various securities, including stocks, bonds, and others. Like stocks, an investor can buy and sell ETFs shares from a stock exchange. There are different types of ETFs including currency ETFs, leveraged ETFs, specialty ETFs, commodity ETFs, bond ETFs, and stock ETFs.
What is an RRSP and a TFSA?
A Registered Retirement Savings Plan (RRSP) is registered with the federal government of Canada.
When one puts money in an RRSP account then there are some tax benefits. There’s no tax imposed on the funds in the RRSP account. The money you earn from the RRSP is tax-deferred until it is withdrawn.
A Tax-Free Savings Account (TFSA) allows a person to earn tax-free money. The program was started in Canada in 2009 and lets individuals aged 18 or older earn tax-free income throughout their life by getting a valid social insurance number (SIN). It is a saving account in which dividends, interest earned, and capital gains are exempted from tax.
Also read: Smart financial planning tips for parents: Include RRSP & stocks
Bottom line
The above investment knowledge helps you understand how different assets work. Considering the above questions and answers about the investment process is a start for a newbie looking to invest. However, there is much to research about each company and particular stock before an investor parks their money.
