Combining a Tax-Free Savings Account and Indexing

So we've discussed index funds and the tax free-savings account, but here is where the magic comes together - you can combine them!

The easiest way of doing so will be by opening a TFSA with TD Canada Trust and purchasing e-series yourself directly online. The slightly more complicated way of doing so will be opening an account with a discount broker and purchasing ETFs (if you haven't read our post on comparing these two options, click here). For youth investors, the best option will likely be the TD route - and we recommend it for its simplicity and effectiveness. Let's discuss how you can go about doing so and what the benefits are.

How to open a TD Canada Trust e-series account
To open an investment account you will need to meet with a TD representative. To do this, you can call or visit your local branch and set up a meeting time (don't worry this is all free, and so is opening the account). You will simply need to explain to the TD representative that you wish to open a TFSA for purchasing Index funds. It is quite likely that they may advise you to purchase other products such as much more expensive mutual funds. Don't be put off by this they are simply doing their job of trying to get customers to buy more expensive products and are not insistent. It's very possible your TD representative may never have even heard of e-series! This is because in order to keep the costs (MER) of e-series low, investment advisors will typically not be trained to sell e-series (training costs money). This is also why you can only purchase e-series online (no phone service option). Don’t worry though, purchasing these online is very easy.

When you open an account, you will need to make your initial deposit of $100 minimum. If you can afford it, I would recommend making a deposit of $1,000 or more for the sake of purchasing multiple e-series. This is because the minimum purchase amount for an e-series fund is $100. Remember that this is a TFSA so you are capped as to how much you contribute to this account! If you already have a checking account with TD, they will be able to make an easy direct transfer for you. If this is the first account you open with TD, the easiest ways to make your deposit can be either by cash or by writing a cheque to yourself (from some other bank account). Once your account is opened, it may take a few days for your funds to be available to trade, then you will be ready to begin investing!

Steps overview:
1. Set up a meeting with TD representative to open a TFSA for purchasing e-series
2. Open your account
3. Transfer funds
4. Decide how you wish to balance your investments
5. Place orders

It used to be much more of a hassle to open an account to purchase e-series but with the implementation of TFSAs in the last few years, it's never been easier.

Advantages of using a TD TFSA with e-series

• Easy to open an account
• Easy to manage an account
• No fees for purchasing or selling e-series
• Minimum deposit of only $100 to open an account
• Cheapest index funds directly available to Canadians
• Pre-authorize payment plan option
• Easy way to have very strong diversification in investments
• DRIP program available

The reason why I find combining a TFSA and e-series to be optimal for youth is that it's simple and effective. It is the cheapest way for youth to get into the market with an opportunity to achieve better returns than fix investments while having much lower variance, risk and work requirement than investing in individual stocks. Ideally with an index portfolio, you are continually adding to your investments allowing them to compound. This is very difficult to do if you have a small sum to invest and must pay hefty transaction fees. Furthermore, investing in indexes takes very little time and effort. If you so wish, you could simply add money to your TFSA once a year and rebalance your portfolio - more on what this means down below!

Note that there is a minimum holding period of 30 days with e-series, if you sell before the end of this period you will receive a penalty. One the other hand, if you had 50 units of some e-series for over 3 months and had bought 5 more units last month, you would still be able to sell off 50 units with no penalty.

To expand on the DRIP program, in another post when discussing common stocks (link), we mentioned some companies pay dividends (direct sharing of profit with investors). When you purchase an index, the fund receives dividends from some of the companies it holds. For example, TDB 900 - Canadian Stock Index, currently has top holdings of three major Canadian banks: RBC, TD and Scotia Bank which all pay dividends (4.6%, 3.94 and 5.16% respectively, at the time of this writing). As an owner of an index fund you get to share in these dividends as a function of how much of the fund you own. DRIP stands for Dividend ReInvestment Plan and means that when you receive dividends, they are automatically reinvested into more index units (post on dividends and DRIPs coming soon!). In terms of the pre-authorize payment plan, TD allows automatic purchasing of Index with a minimum amount of $25, making it even easier to continually contribute to your investment account. While this service may be less relevant to youth investors, it's still a great option to have.

How to begin investing in e-series
Great, you now have an account with TD and are ready to begin investing! so what now? It's time to discuss balancing. You will need to decide which e-series you wish to purchase and in what quantities. This can be as simple as you wish. Here is a list of all the e-series available:

TD e-series (link)

To get started you can begin with a portfolio that consists of 1) Canadian stocks, 2) Canadian bonds, 3) U.S. Stocks and 4) International stocks (Non-North American). This would provide with a very diversified portfolio. This would also be one of the more common index strategies to take, if you wish to follow it, here are the potential corresponding tickers:

TD Canada Bond Index - e (TDB909)
TD Canadian Index - e (TDB900)
TD International Index (TDB905)
TD U.S. Index - e (TDB902)

The U.S. Index (TDB902) here tracks the S&P 500, if you wished to purchase one that tracks Nasdaq (TDB908) that would also be an option.

Now that we've decided which indexes to wish to purchase, we need to know how much of each. This again comes down to a personal option. Having greater ownership in stock indexes is associated with greater variance (higher risk, but greater potential rewards) than bond indexes (lower risk, but less potential rewards). Generally speaking, the younger you are, the more aggressive you should be with your index portfolio as you can stand to take a slightly greatest risk for more reward since your investments are likely not your complete retirement fund (you have time to ride out market lows).

Recommendation for portfolio allocation for an investor in their 20s*:

10-25% - Canadian Bond Index

25-30% - Canadian Stock Index

25-30% - U.S. Stock Index

25-30% - International stock Index

These ranges are taken from the book Millionaire Teacher by Andrew Hallam (link). Refer to page 112 in the book. We wrote an article just on portfolio models, click here to read it!

Every year you can rebalance your portfolio to your original percentage allocation. If you're contributing fresh money to your investments, that money can be used to rebalance. If that is not the case, or the amount you are adding is not enough, you can sell from the best-performing index to purchase more of the worst-performing (following the buy-low, sell-high principle).

The purpose of diversification is to lower variance. By investing in Index funds as opposed to individual stocks, you are already massively reducing variance. So how much does your allocation really matter? We will discuss portfolio performance in an upcoming article. The take away message about balancing is that over a large enough sample size (many years) your allocations will likely not make a huge difference. On the other hand, having a greater bond exposure will reduce the volatility of extreme lows and highs. Therefore you will have fewer swings on a shorter sample size and at the end will likely experience slightly lower returns (at least this is what has been seen so far).

Ideally when approaching index investing, you have little care to what is actually happening in the market day-to-day. Given how highly diversified you are, short-term market swings will have little impacts on your portfolio. This also highlights a benefit of investing in indexes, you are never trying to predict market trends. By always purchasing/rebalancing, you remain versatile and flexible to external market dynamics that you simply cannot account for. This is a major benefit as opposed to investing in individual stocks where you typically have to do a lot of research and up-keeping work to keep an eye out on your investments. Furthermore, because the swings are lower in an index portfolio (and you are heavily diversified), it is easy to have little emotions towards your investments. It is easy to panic and sell off a stock at a loss after seeing it drop double digit percentages in just a few days. If anything hearing of market crashes is beneficial to long term index investors as it allows to buy more at a lower price! Also note that by having a DRIP program in place, you are automatically purchasing some small amount every year. The three stock indexes mentioned (Canadian, American, international) pay dividends out yearly, while the Bond index pays out monthly.

Lots more articles coming soon expanding on these topics!


Here are some of our other articles on similar topics:
Choosing an Index Portfolio Model
The Power of Time (and why you should start investing now)
The Tax-Free Savings Account (TFSA)

-Yinvestors.


For more information regarding e-series, here is the link to TD's e-series page. Please note I do not work for nor do I receive anything from TD for recommending their product. I recommend e-series purely because they are currently the cheapest Indexes in Canada and I find TD provides a trading and managing platform that is very user-friendly.

keywords: tfsa, tax-free savings account, index investing, e-series, stock index, bond index, DRIP, dividend reinvestment plan, best Canadian index, index funds Canada, tfsa advantages, index funds benefits 

TFSA: Index Funds vs. ETFs

Both index and exchange-traded funds are types of mutual funds that are passively managed. They are designed to track a specific exchange, as oppose to mutual funds that aim to beat an exchange. For example, a TSX index fund would consist of many major Canadian companies. If the fund performs as it should, year after year it should fluctuate very closely to its respective tracking exchange. So what's the difference between Index funds and ETFs and which ones should you buy? Let's get in the lab and crunch some numbers.

Index Funds

Index funds are sold by the company managing the fund, for example you buy TD e-series directly through TD's broker. These index funds would not be available on the market to external investors who do not have an account at TD. Given that Index funds operate on MERs, purchasing and selling them will often be free of charge. We will discuss e-series heavily in throughout this blog as they are currently the cheapest index funds directly available to Canadians.

Exchange Traded Funds

ETFs are also index funds but openly traded on the market. This has two key implications, you now have to pay a commission to purchase/sell the fund and it has access to a greater pool of investors. The brokerage company will not be the entity managing an ETF you purchase. On the positive side, EFTs can be cheaper than standard index funds. A popular company that has the cheapest ETFs out there is Vangaurd. While being an American company, Vangaurd is increasingly providing new products targeted towards Canadians.

So it all comes down to balancing the need to have a discount broker and pay transaction fees to purchase a cheaper product, or simply to get a slightly more expensive product for no other fees.

TD E-series (Cheapest Canadian Index)
Given that e-series are currently the cheapest index funds available, we will use them as a basis for comparison. Here are the fees associated with e-series:

Table 1: MER associated with common TD E-series*

Canadian Stock Index (TDB900) MER: 0.33%

U.S. Stock Index (TDB902) MER: 0.35%

Canadian Bond Market Index (TDB909) MER: 0.50%

International Stock Index (TDB905) MER: 0.54%

Average: MER: 0.43%

The MERs are background fees charged. You do not see them ever passing as fees in your account transactions and they are not included in the performance assessment of an index. The four funds mentioned are some of the main e-series available (17 in total). On the TD Canada Trust e-series page you can find information on all of their available e-series (link here). To put the MER in perspective, it costs $43 per year on a $10,000 investment that is equally balanced between the four funds. That’s right, for $43 you can own a wide scope of the market that consists of hundreds of individual stocks and bonds!

If you are interested in getting started with opening an e-series account with TD, click here to learn (Article Coming!) more about how you can do this. The minimum amount required to open an account is only $100 and there are completely no fees for purchasing or selling e-series (although there is a 30-day minimum holding period).

Vangaurd Index (ETF)

Now let’s compare this to the Vangaurd indexes (ETF). Vangaurd in a non-profit company that is the biggest provider of index funds and currently manages around $3 Trillion in assets. If you are American, you can open an account directly through vanguard and purchase indexes that way. Unfortunately for Canadians, the only way to purchase Vanguard funds is by buying them as ETFs. Never-the-less, here is a look at the MER of some common Vangaurd indexes:

Table 2: MER associated with common Vangaurd ETFs

Vangaurd Canada ETF                           MER: 0.09%
Vangaurd Emerging Markets ETF          MER: 0.29%
Vangaurd S&P 500 ETF                         MER: 0.13%
Vangaurd Canadian Aggregate Bond     MER: 0.19%
Average                                                   MER: 0.175%

On a $10,000 investment equally balanced between all 4 index, the yearly fee would be around $17.5. This represents a near 60% discount from e-series. But! There are transaction fees not accounted for. If we assume each transaction costs $5, a total of 8 transactions per year would cost $40 (assume biyearly contributions). This would now make e-series the cheaper option. One of the fantastic options with e-series is the ease to add to your investments continuously throughout the year without having to worry about transaction fees. This is no longer the case when you have to pay a commission. If you have significantly more money to invest, ETFs can become a better option as depicted below:

Table 3: Comparing TD e-series and Vangaurd ETFs

As the table above shows, unless you have a substantial sum e-series would be a cheaper option. By linear interpolation, the break-even point would be around $15,700 under the estimated fee structure. The take away message here is that unless you have a substantial sum, it may not be worth the time dealing with opening an account with a broker and paying commission for trading ETFs. 

Keep an eye out for Vangaurd, they have recently released new indexes that target specifically Canadian Investors. If Vangaurd was to begin offering investment accounts directly to Canadians, they would clearly become the best option for Index investing. Many more blogs to come expanding index funds, stay tuned!

- Yinvestors.

Notes: 

• Currently Questrade provides free purchases of ETFs (although you still pay fees for selling). If you are looking to get investing in index funds, Questrade may a great starting place due to this promotion.
• The MERs of e-series have actually been increased slightly across the board during June 2015. The fees used to be: TDB905 (0.5%), TDB900 (0.31%), TDB902 (0.33%) and TDB909 (0.48%).  

Key words: ETF, ETFs, Exchange Trade Funds, Index funds, s&p 500 index fund, best index funds Canada, index fund list, low cost index funds, index investing, e-series, Vangaurd ETF, bond index, TSX index fund. 

Fees with Discount Brokers

When deciding which discount broker to use (or to use one at all), you will need to assess the associated fees and commissions. This article will underline the main fees that you should be looking out for and informing yourself about before opening an account.

1. Trading fees.

Discount brokers are awesome in providing extremely cheap methods of purchasing investments. When looking for a discount broker you will want to find one that allows you to trade for no more than $5/trade. Given you will likely be making small transactions to begin with, you need to keep fees as low of a percentage as you can. Finding the trading fees on a discount broker is easy while going to their website, they tend to advertise them as it is one of their leading strengths. Transactions fees start around $1 and go up from there.

2. Currency exchange rates

If you wish to invest in the U.S. stock market, you will need to buy USD (U.S. Dollars) as this is the currency the market operates in. Note that if you simply wish to invest in the Canadian market (TSX), you will not need to deal with any currency conversion! Discount brokers tend to provide a cheap way of buying currency such as trading on Forex (a currency trading platform). This allows you to buy currency at the going rate (plus a small fee), which is exceptionally better than what large banks will give you. Make sure you are aware of these fees and whether they really are small fees before making Forex purchases. The fees can either come as a fix commission or as a floating point (some decimal points in correction of the exchange rate as a fee).

3. Activity fees

Discount brokers like to attract heavy traders, they are generally not targeting small personal investors. This means that some may charge you an activity fee if you do not have a minimal account value or if you do not trade often enough. For example, if you are under 25-year-old, Interactive Brokers charge activity fees of $3 minus any commissions (example: if a given month you generated $2 in commissions, you fees would only be $1). Meanwhile Questrade charges activity fees of $25/quarter (every 4 months) if your account value is under $5,000, although this is waived if you are below 25 years old.

4. Withdrawal fees

Some discount brokers may have fees for withdrawals. While the major ones have some free options if you are simply withdrawing cash (not investments), be sure to inform yourself especially if you have a specific banking condition. Also note that if you are transferring an account (say for example you want to transfer your TD TFSA to Interactive Brokers), there will be associated fees. If you transfer enough assets, the discount broker or bank being transferred to may cover these for you.  

5. Trading on other markets

If you would like to trade stocks that are not listed on a Canadian or American exchange, be sure to inform yourself about all the associated fees before placing an order. These can be substantially higher than the fees of trading on the North American exchanges.

Here is a list to some of the biggest discount brokers available to Canadians (link to their fees page), not in any particular order.

1. Interactive Brokers

2. Questrade

3. Virtual Brokers

Here are some of  the brokers of big Canadian banks. With these brokers you can expect higher fees (although they are becoming increasingly competitive), but you can also expect more support if you need help with your investments and a more user-friendly trading platform. 

1. BMO InvestorLine (Bank of Montreal's Broker)

 

2. RBC Direct Investing (Royal Bank of Canada's Broker)

3. Scotia iTrade (Scotia Bank's Broker)

4. TD Direct Investing (TD Canada Trust's Broker, previous TD Waterhouse)

If you have any question regarding fees or personal experiences you wish to share, please comment below!

- Yinvestors.


keywords: stock brokers, investing, Canadian stock brokers, stock brokers in Canada, fees for buying stocks, commission fees, hidden fees, index funds, index investing.

Resource Recommendation

Top books for Investing:

1) Millionaire Teacher by Andrew Hallam.
This was the first book I read that provided the bridge between wanting to invest across the entire market, and actually learning how to go about doing so. It has specific sections targeted towards Canadians and does a fantastic job at depicting how you can amass significant wealth with the correct strategy. The book is written in a format that is very easy to follow.

2) The Intelligent Investor by Benjamin Graham
This may very well be the most valuable and fundamental book on investing there is. If you were to ask the legendary investor Warren Buffet which one book to read, he would tell you this one. This book will teach you about value investing and give grounds to develop a keen eye for value. Especially read this book if you are interested in buying individual stocks and managing your own portfolio.

Top Websites for Index Investing:

1) Canadian Couch Potato - Your Complete Guide to Index Investing.
This website has a tone of high quality posts targeted directly towards Index investing. Browse through recent and past posts and engage with others that are passionate about index investing!

2) Andrew Hallam`s website. (Author of Millionaire Teacher)
Andrew has a vast collection of articles on his website, many of them relating to index investing. Another fantastic source of information.

Top Other Source for Index Investing

1) How to Win the Loser's Game (video).
An 80-minute documentary that does a fascinating job at comparing actively managed funds and passively managed index funds. Very informative and easy to follow. It takes a main focus on British investing, but the concepts are fundamental and applicable to any markets. If you are unsure about the legitimacy of the index investment strategy, watch this video.

This list will remain an interactive area where we continually add recommended sources. If you have other recommendations please add them to the comment section so we can continually make this list more resourceful!

- Yinvestors.

keywords: index investing resources, couch potato investing.
Please note: for the book links, I am an Amazon.ca associates since early 2016.

The Tax-Free Savings Account (TFSA)

A TFSA is an investment account type that you can open with banks or major discount brokers that allows your money to grow tax-free. Typically investors pay taxes on profits made from their investments the year they are sold. In 2009, the government of Canada introduced the tax-free savings account as a mean to help people save more money and grow their investments completely tax-free. TFSAs are a fantastic option for youth looking to get into investing and are the #1 account type that we recommend for getting started. 

TFSA functions on a yearly contribution principle, meaning every year there is a fix maximum amount you can contribute to your account. Your TFSA allowance begins to accumulate as soon you turn 18 (as a Canadian citizen). The current allowance is $5,500/year. The following table depicts how the contribution amount (annual limit) has changed since implementation and the cumulative total if you were 18 or older in 2009.

TFSA Annual limits and Cumulative Total by Year

source: Wikipedia 

The Harper government raised the TFSA allowance to $10,000 during 2015, but when Trudeau won the election towards the end of 2015, the allowance was reduced back to $5,500 for the upcoming year. 

TFSAs are a great option for youth as they make things simple - no need to worry about taxes! Furthermore, the allowance amount is substantial enough for active young investors. TFSAs are also very easy to open and available as savings account with banks as well as with major discount brokers. Within your TFSA you can purchase any standard investment product. If you have to sell off your investments, your TFSA allowance will completely refresh the following year. For example, if you were 18 in 2009, and had maxed-out your TFSA at $41,000 by 2015 but needed to withdraw your savings to purchase a home, in 2016 you would be allowed to put back the full $46,500 (41,000+5,500 from the new year). 

So why care about TFSAs? When looking to grow your investments, you want to minimize anything that takes away from it, that includes fees and taxes! The RBC website has a great graphic to show the impact of how an investment can grow in a TFSA as opposed to a regular taxable account.

Source: RBC

With this example, over a 20-year investment period an investment would have grown to $194,964 in a TFSA, as opposed to $156,258 in a taxable account. This represents nearly a 25% increase. Money saved each year contributes to compounding, thus money saved generates more money from itself. No matter what your investment goals are, we highly recommend opening a TFSA as a first step to begin investing. We cannot say enough good things about TFSAs! 

Tips:

1. If you wish to invest in individual stocks, compare fees of trading with your local bank vs. opening a TFSA with a discount broker. The best option will depend on how often you are looking to trade and your investment amount. (link)
2. If you wish to invest in Index funds (owning a small portion of the complete market), there are two basic ways to go about it in a TFSA. (link)
3. If you wish to find out more information about TFSAs, click here for a link to the government of Canada's website.

- Yinvestors.


keywords: TFSA, tax-free savings account, tfsa contribution room, tfsa limit, tax free savings, free savings account, tfsa rates.

Overview of Yahoo Finance

If you are into investing in individual stocks, Yahoo finance is a fantastic starting point for analysis. In this post we will take a brief look at what you can see in Yahoo finance and how to decipher it.

Let's get started with a concrete example. If you look up Apple (AAPL) the following overview of the company will come up:



















This screen shot was taken on the morning of January 27, 2016.

On the very first line you see the company name, ticker symbol and the exchange which in trades on (NASDAQ).

On the second line you see the price ($95.01), the associated change during market hours (down $4.98, or 4.98%) and some information about after hours trading (not always applicable).

Left column

Prev Close: previous closing price prior to this day's trading (was at $99.99, stock down $4.98, we are now at $95.01).
Open: price at which the stock began trading on this business day.
bid: current price looking to purchase (and quantity).
ask: current price looking to sell (and quantity).
1y Target Est: an estimate on the stock price in 1 year based on analyst average.
Beta: depiction of volatility as compared to S&P 500 index, over 1 indicates more volatile and under 1 indicates less volatile than the overall S&P 500.
Next Earnings Date: date of release for next earnings report.

Right column

Day's range: the extreme price range within the trading day.
52wk Range: the extreme price range within the last year (lowest and highest points).
Volume: how many stocks have been traded so far on this trading day.
Avg Vol (3m): how much volume on average per day in the past 3 months.
Market cap: the total value of all shares available (#shares*price of share).
P/E: Price/earnings ratio is an indicator of valuation. How much times more is the stock trading at currently compared to yearly earnings generated. You can think of P/E ratio as how long you would need to hold an investment so that it would generate that capital back in earnings. In this example 95.01/9.22=10.30. (P/E can only be positive, if a company experiences a loss it will have no P/E).
EPS: earnings per share, how much earnings in generated per share.
Div & Yield: what (if applicable) are the dividends paid per share in dollar amounts (and percentage).

This gives a rapid global overview of the stock and its current situation in the market place. On the right-hand side is a graph of the price fluctuation for that day, outlined by a dotted line that shows the previous close price. You can use this graph to see the historical price fluctuations of a stock.

Take away message!

At a quick glance we can find a lot of information on a company. For example, we can see that Apple is a massive company with a 526 Billion market cap. We can also see it a down a lot today (5% is a massive swing for such a large company). We can see it is trading close to the lowest it has all year. It has a P/E ratio of slightly over 10 which would indicate the stock is potentially cheap. The stock pays a substantial dividend and is producing noticeable earnings. Furthermore, at the time of this screen shot it was only 10:19AM and the volume was already at 36.6 million shares as compared to a 3-month average of 47.3 million shares. The market is open until 4PM, so we can expect this to be a very high-volume trading day. This often happens what a stock rises or drops substantially in a given day.

Note that these are simply some of the key statistics and should not solely be used to make investment decisions but do provide a starting point and basis for quickly assessing a company. This is simply a light introduction to some key statistics!


- Yinvestors.

keywords: investing, index investing, stock, dividends, common shares, company stocks, company shares, yahoo finance, price earnings ratio.

Investment Options for Beginners

There are 3 main broad classes of common investments, they are: stocks, index/mutual funds and bonds. Each have their various associate risk and potential reward. Generally speaking, stocks are the riskiest although hold the greatest potential for reward, while bonds are the most stable, but tend to provide lower yields. Let's explain the common investments:

Common stocks
A common stock (or share) is a piece of a company that you are purchasing off the market. The market consists of a pool of investors (some individual investors, like yourself) that are agreeing to purchase and sell shares at a given price. In the general case, when you place an order to purchase a stock you are buying it from another investor who has agreed to sell his stock at the price you have agreed to pay. When you own a stock of a company you own a very small portion of that company.  For example, if you buy a share of Apple (ticker symbol AAPL), which currently has a total of 5.54 billion shares in the market, you would own 1/5,540,000,000 of Apple. So yes a very small piece, but a piece never-the-less!

Shares rise and drop in value over time due to changes in market dynamics that influence the desire for the share. One basic example of this, if Apple releases a brand new product that is very popular and proving to be very profitable, more people will be interested in owning the stock and thus the price would rise as there is a finite quantity of it. This is a very simple depiction of one reason why a stock could rise. On the flip side, if you own a solar panel company such as Fist Solar, and news comes out that the federal government will no longer subsidize the solar industry, the stock will likely drop due to decrease in forecasting sales. The price of a stock fluctuates with the demand/desire for it.

One fantastic place to obtain information about companies is yahoo finance. It is definitely a better source for stocks traded the U.S. market (NYSE) than for Canadian stocks (listed under the TSX). In the search box you will need to enter either the company name of the ticker (stock) symbol. Every publicly traded company has an associate ticker symbol. For stocks on the Toronto Stock Exchange (TSX - the Canadian stock market). That symbol will be followed by .TO, for example TD bank is traded on both exchanges and has symbol TD.TO on the TSX and simply TD on the NYSE. (Overview of Yahoo finance)

There are two ways you make money from owning a common stock are either by price rising or through dividends. We have discussed the price fluctuation briefly above. In terms of dividends, certain companies share some of their profits with shareholders. The payments of these shared profits are called dividends. Dividends can be paid out monthly, quarterly or yearly. If we go back to the Apple example, they currently have a dividend yield of 2.05%, or $2.08/stock (currently trading at $99.99/stock). Let's assume this stock pays quarterly and that you owned 100 shares of Apple (currently worth $9,999). Every quarter you would receive  ($2.08/4)*100 = $52 from Apple, or a total of around $204 on the year.

We'll leave common stocks at that for now. We will discuss some of the key statistics that you encounter in Yahoo finance to help assess a company in an upcoming article. (article link)

Index/Mutual Funds
A mutual fund is a professionally managed portfolio that is funded by a pool of investors. For example, it can consist of a 5 million dollar portfolio run by a major bank that includes $10,000 investments by 500 individual investors like yourself. The managers of the portfolio than purchase stocks or other investments on behalf of the investors to try grow the portfolio to beat the stock market. In exchange for their expertise, the mutual fund charges an MER (management expense ratio), which is a percentage of your total investment. MERs will be in the range of a couple percentages (average around 2.5%). This represents a yearly fee of (2.5/100) *$10,000=$250 for each of our 500 investors listed above. The MER is a flat fee that is charged whether or not the portfolio does well that given year.

Index funds are similar to mutual funds except they are aimed at following, or tracking markets as apposed to beating them. For example, a TSX index may consist of 100 of the biggest TSX companies, thus if the TSX rises 5% in a given year, you can expect your index to have a similar return. The major benefit of buying index funds are the low costs associated. Some of the cheapest index funds currently available to Canadians can have an MER around 0.33%. That means this specific investment would cost you around 7 times less per year to own than an average mutual fund. Index funds can afford to be much cheaper as they are managed in a more passive method (less analysis, marketing and trading).

We will expand greatly on index funds within this blog, keep posted!

Bonds
If a company or government wishes to raise money for various projects or activities, one way of doing so is to ask the public (through the market place) for a loan. They borrow the funds for a period of time and, in return provide interest on the loan. For example, if Bill's Burger company wishes to open 5 new stores in New York but is currently short on cash and each store costs $500,000 to open, they can issue a bond to raise the $2,500,000. The bond would then come with an associated coupon (interest rate), a maturity date (when the loaned funds are returned) and a credit rating for the bond. In our burger example, let us say the face value per bond is $1,000 (must buy in $1,000 units), we would have the following situations as issuance:

Principal: $2,500,000
Interest rate (annual coupon): 5%
Maturity date: January 2026 (10 years)
Credit rating: A- (fairly high quality, this burger company has a strong credit rating).

There are thus a total of $2,500,000/$1,000 units=2,500 units available.

In the simplest case, say you buy 10 units of this bond (a total loan of $10,000 to Bill's Burger) would you receive $500/year in cash flow for 10 years, after which Bill's Burger would return your initial $10,000 and you would thus have made $500/year*10year=$5,000 on your investment.

A bond's market value can rise or fall during the 10-year period in response to interest rates available in the market place. If interest rates drop to 3.5% and your bond continue to pay 5%, you bond is now of higher value. To correct for this, the price per unit would eventually increase to $1,000*(5/3.5)=$1428.5. In this way, bond prices rise if interest rates drop and vice versa.


- Yinvestors.

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