Investing Basics

Q.1. What are the basic steps in investing?

In order to begin investing appropriately there are a number of things you need to know. You need to clearly define your goals. You also need to know how comfortable you are with such things as risk-taking and your tolerance for seeing the value of your investment fluctuating. Knowing these things will help you decide on the types of investment that are appropriate for you. An investment counsellor can be invaluable in assisting you.  

Q.2. What different types of investments are there?

There are many types of investments. Some are simple, such as bank accounts, which pay you interest on your savings while others, such as mutual funds, are more complicated.  In addition to these, there are such things as Guaranteed Investment Certificates (GICs), Canada Savings Bonds (CSBs), stocks, bonds, mutual funds, and Exchange-Traded Funds (ETFs). Each of these offer specific value and require a clear understanding of the nature of the investment.

Q.3. What kind of investor am I?

The answer to this question depends upon your risk tolerance. Would you rather get less of a return on your investment but keep your money safe or would you rather take a greater risk for the chance of a higher return? Your answer to that question will determine the types of investments that are best for you. A risk tolerance quiz can help you clarify your feelings.

Q.4. How do I invest for income?

Investing for income means that you are looking for investments that will pay something back to you at set times. Examples of investments for income are Guaranteed Investment Certificates (GICs), Canada Savings Bonds (CSBs) and money market funds.

Q.5. What are the costs involved in investing?

There are many different costs associated with investing. Some common costs that investment companies charge may include: charges to maintain your account or close an account; buy or sell on your behalf; and offer you advice. Other costs that you could possibly incur may include: lost interest if you do not keep a minimum balance in a bank account; penalties for cashing out early; taxes payable when you remove funds from a sheltered account; and decline in the value of your investment.

Q.6. What can I do to avoid making mistakes?

There are some tips to minimize potential mistakes. First of all, make certain that you understand the details of any investment before investing. Set yourself clear goals. Don’t “put all your eggs in one basket” – keep a mixture of investments. Avoid taking chances you can’t live with and don’t follow hot tips. Keep a close watch on your investments and make careful, considered decisions. A test of your financial knowledge will help you understand your level of understanding.

Q.7. How can I bank through Sharia-Compliant banking?

Various financial institutions offer Sharia-compliant banking for their clients. Their basic banking accounts are limited strictly chequing accounts with no interest incurred on the account.

Q.8. How can I invest through Sharia-Compliant banking?

Many banks have Sharia-compliant funds which meet all the requirements of Sharia Law and principals for Islamic Finance. These funds follow specific rules which include: only investing in Sharia-compliant companies, appointing a Sharia board, carry out annual Sharia audits and purifying certain types of banned incomes (such as interest) by donating them to charity. There is a designated stock exchange that complies with Sharia Law, it is named the S&P/TSX 60 Sharia Constituents. The exchange consists of companies that do not profit from the sale of alcohol, pork products, pornography, gambling and military equipment or weapons.

Q.9. How can I get a Sharia-Compliant loan?

Some financial institutions and private firms offer mortgages with accordance of Sharia Law. The process is as follows:

  1. Client puts a down payment on the loan (minimum usually 5%)
  2. Independent trust/company holds the title of the loan
  3. House will be leased until the client pays off the loan
  4. Trust/company pays property tax and real estate tax, and put amount in lump sum added to monthly rent

The client will have to make monthly payments until fully completing the agreed upon amount of the loan. These contracts are interest free and consist of customization for a case-by-case analysis. An example of a private firm that supports Sharia-Compliant loans can be found here.