When you invest, you use your money to buy assets that may increase in value or generate income. Instead of keeping all your money in cash, you put some of it to work with the goal of building wealth and reaching long-term financial goals. The point of investing is to give your money the chance to grow over time.
Investing can help you save for retirement, a child’s education, a future home or simply build financial security. But investing isn’t a guaranteed way to make money. Investments can lose value, sometimes significantly. The key is understanding the relationship between risk, potential return and time.
Why Does Investing Matter?
Keeping money in a savings account can make sense for short-term needs and emergencies. But over long periods, inflation can reduce what that money can buy. If the cost of everyday goods and services rises over time while your money earns very little interest, your purchasing power can decline. Read What’s the point of inflation? to learn more.
Investing gives you the potential to earn returns that outpace inflation over the long term. Those returns can come from increases in the value of your investments, income such as dividends or interest, or both. Investing also gives you access to one of the most powerful forces in personal finance: compound growth.
What is compound growth?
Compound growth happens when your investment earns a return, and then those returns have the opportunity to earn returns of their own. Imagine you invest $10,000 and earn an average return of 6% per year. If you don’t withdraw the returns, your money can grow to more than $18,000 after 10 years and more than $32,000 after 20 years. Note that this is a hypothetical example that doesn’t account for fees, taxes or fluctuations in investment returns.
Ultimately, the important idea is that time can make a big difference. This is one reason starting early can be valuable. You don’t necessarily need to invest a huge amount of money to benefit from long-term growth. Regular contributions over many years can add up too.
What Are the Most Common Types of Investments in Canada?
There are many ways to invest. The right choice depends on factors such as your goals, time horizon and comfort with risk.
Stocks
A stock represents an ownership interest in a company. When you buy shares of a publicly traded company, you become a shareholder. Stocks can increase in value, and some companies pay dividends to shareholders. However, they can also decrease in value – sometimes quickly.
While stocks generally have higher potential for long-term growth than lower-risk investments, they also come with greater volatility.
Bonds
A bond is essentially a loan made by an investor to a government, municipality or company. In return, the issuer generally pays interest and promises to repay the principal at a specified time. Bonds are generally considered less volatile than stocks, although they still carry risks. Their value can fluctuate, particularly when interest rates change.
Guaranteed Investment Certificates (GICs)
A GIC is an investment offered by a financial institution for a specific term. You typically agree to leave your money invested for a set period in exchange for a stated interest rate. GICs are popular among Canadians who want relatively predictable returns and don’t want to take on the same market risk associated with stocks.
Mutual funds
A mutual fund pools money from many investors and uses it to purchase a collection of investments, such as stocks, bonds or both. A professional portfolio manager typically manages the fund according to its investment strategy.
Mutual funds can provide diversification, but fees vary and can reduce your overall returns.
Exchange-traded funds (ETFs)
ETFs are investment funds that trade on a stock exchange, much like individual stocks. Many ETFs hold a diversified collection of stocks or bonds and are designed to track an index or follow a particular investment strategy. ETFs have become a popular way for investors to build diversified portfolios, often at relatively low management costs.
Cash and cash equivalents
Savings accounts, money market investments and similar products can play a role in an investment portfolio, particularly when you’re saving for a short-term goal. They generally offer lower potential returns than stocks but can provide greater stability and accessibility.
Investing vs. Saving: What’s the Difference?
Saving and investing aren’t competing strategies. They serve different purposes.
Saving generally means putting money somewhere relatively safe and accessible, such as a savings account. It’s useful for emergencies and short-term goals. On the other hand, investing means accepting some level of risk in exchange for the potential for higher returns over time.
While money you expect to need next month probably shouldn’t be exposed to significant investment risk, money that you’re setting aside for a goal that’s 20 or 30 years away may have more time to ride out market fluctuations. The right balance depends on your circumstances.
What Are the Benefits of Investing?
Your money can grow
The biggest reason people invest is the potential to increase their wealth over time. Investment returns can come from capital appreciation, dividends, interest and other forms of income.
Investing can help you reach long-term goals
Investing can help you work toward goals such as retirement, education or long-term financial independence. The longer your time horizon, the more opportunity your investments may have to grow.
You can benefit from compound growth
Reinvesting your investment returns can allow your money to grow on an increasingly larger base. Over decades, this can make a significant difference.
Investing can help combat inflation
Inflation means prices generally rise over time. Investments that generate returns above the rate of inflation can help preserve or increase your purchasing power. There’s no guarantee that investments will beat inflation in every year—or over every period.
You can build wealth without doing everything yourself
You don’t necessarily have to research and buy individual stocks. Mutual funds and ETFs, for example, can provide exposure to many investments in a single product.
What Are the Drawbacks of Investing?
Investing has potential benefits, but it isn’t risk-free.
Your investments can lose value
Markets go up and down. If you invest in stocks, ETFs or mutual funds, the value of your investment can decline. In some circumstances, you could lose part or even all of your original investment.
Returns aren’t guaranteed
Unlike a guaranteed interest rate on certain deposits or GICs, the future return on most market-based investments isn’t known in advance. An investment that performed well last year may not perform well next year.
Investing requires patience
Markets can be unpredictable in the short term. Selling investments because of a temporary decline can turn a paper loss into a permanent one. Long-term investing generally requires the ability to tolerate periods of volatility.
Fees can reduce returns
Investment products can have management fees, trading costs or other expenses. Even seemingly small fees can have a meaningful impact on long-term returns, so it’s important to understand what you’re paying.
There is a learning curve
Investing can seem complicated at first. Terms such as diversification, asset allocation, risk tolerance and compound growth can take time to understand. The good news is that you don’t need to become a professional investor to get started.
Common Misconceptions About Investing
“I need a lot of money to invest.”
No. Many investment platforms allow people to start with relatively small amounts. Regular contributions can also make investing more manageable. Sure, the amount you invest matters, but so do time and consistency.
“Investing is the same as gambling.”
Investing and gambling both involve uncertainty, but they aren’t the same thing. Investing generally involves purchasing an asset that has the potential to generate income or increase in value. Gambling involves wagering money on an uncertain outcome, generally with predetermined odds.
That doesn’t mean investing is risk-free. Some investments can be highly speculative.
“I need to pick winning stocks.”
You don’t. Buying individual stocks is only one approach to investing. Diversified mutual funds and ETFs allow investors to own many investments at once.
“I should wait until the market is doing well.”
Trying to predict exactly when to enter or exit the market is extremely difficult. For many long-term investors, making regular contributions can be a more practical approach than trying to time the market.
“Investing is only for retirement.”
Retirement is a common investing goal, but it isn’t the only one. You might invest for education, a future home, long-term wealth building or another goal that’s several years away.
Frequently Asked Questions About Investing
What is investing in simple terms?
Investing means putting money into assets with the expectation that they may increase in value or generate income over time.
Why should I invest my money?
People invest to give their money the opportunity to grow and to help reach long-term financial goals. Investing can also help protect purchasing power against inflation.
How much money should I invest?
There’s no universal amount. Your investment contributions should fit your income, expenses, debts, emergency savings and financial goals. A common approach is to start with an amount you can comfortably contribute and increase it as your circumstances change.
Is investing risky?
Yes. All investments involve some degree of risk, although the level varies significantly between investments. Generally, investments with higher potential returns also come with greater risk.
Is investing better than saving?
Neither is universally better. Saving is generally more appropriate for short-term goals and emergencies, while investing may make more sense for money you won’t need for several years. Many people need both.
When should I start investing?
For long-term goals, starting earlier can give your money more time to potentially benefit from compound growth. But, that doesn’t mean you should invest money you need immediately. Before investing, consider having an emergency fund and paying attention to high-interest debt.
Read What’s the point of a budget? to learn how to balance your income, savings, and other financial goals.
How Do You Get Started With Investing?
- Start by identifying why you’re investing. A retirement portfolio may look very different from money you’re investing for a goal five years away.
- Consider your time horizon and risk tolerance. Ask yourself how long you can leave the money invested and how comfortable you are with the possibility of seeing its value fall.
- Choose an appropriate investment account and investment products. In Canada, registered accounts such as TFSAs, RRSPs, and RESPs can provide tax advantages for specific goals.
- Make regular contributions. Automating contributions can make investing a habit rather than something you have to remember to do.
If you’re unsure what investments are appropriate for your circumstances, consider speaking with a qualified financial professional.
Investing puts your money to work.
Over the long-term, investing gives your money the potential to grow through capital appreciation, interest, dividends and compound growth. It can help you work toward long-term goals and build wealth over time. But investing also means accepting risk. Your investments can lose value, returns aren’t guaranteed, and fees and taxes can affect what you ultimately keep.
The goal isn’t to find a magical investment that always goes up. It’s to build an investment approach that matches your goals, timeline and ability to handle risk.
TL;DR
- Investing gives your money the opportunity to grow over time.
- Saving and investing serve different purposes. Saving is generally better suited to short-term needs, while investing can be useful for longer-term goals.
- Compound growth makes time an important part of investing.
- Stocks, bonds, GICs, mutual funds and ETFs are common investment options in Canada.
- Every investment involves some level of risk.
- Diversification can help spread investment risk.
- Fees matter because they can reduce your returns.
- You don’t need to be an expert—or have a huge amount of money—to start investing.
- The right investment strategy depends on your goals, time horizon and risk tolerance.