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Common Stocks

With common stocks you buy and sell the stock of a single company on a stock exchange. Pure and simple. 

Many stocks pay dividends…usually monthly or quarterly.  A dividend is essentially cash that goes directly into your investment account. In some cases, instead of taking the cash you can opt use the dividend to purchase more of the same stock (sometimes at a discount even). Dividend paying stocks are my favourite type of investment.

Example: The Bank of Nova Scotia

Exchange Traded Funds (ETFs)

What is an ETF? ETFs are somewhat like mutual funds in that a single ETF can represent the stocks for several companies. However they are also like a stock in that each ETF gets its own ticker symbol and it can be bought and sold on a stock exchange.
Of course, ETFs are not spawned by themselves…any of a number of companies put these together and as a result, you need to pay them a management fee. Management fees are usually in the 0.1 to 1.5% range. 

Like regular stocks, some ETFs can pay dividends. 

Example: iShares S&P TSX Capped Composite Index

Further Related Links and Articles

Canadian ETFs -
An Overview of Commission-Free ETFs - Canadian Couch Potato

Income Trusts

An income trust can be a single company, or, like an ETF, an investment vehicle that can hold many equities. Incomes trusts are structured to pass cash on to ‘unit holders’, like yourself.  When talking about income trusts we call this cash ‘distributions’ instead of ‘dividends’ (and there is a difference when it comes to taxes). 

A new law came into effect January 1, 2011 and many of the income trusts that existed before then had to convert into regular companies (this is important to know if you are reading older material). Ticker symbols on the TSX end in the letters “UN”.

Because the intended goal of an income trust is to pass as much cash as possible on to you, they do not keep cash left over for themselves to grow the business. As a result, income trusts tend to be mature, stable businesses. At the same time, you wouldn’t expect their stock price to go up (and perhaps down) as much as non-income trust might. 

Example: Inter Pipeline Fund

Real Estate Investments Trusts (REITs)

You can also invest in a special type of stock called a Real Estate Investment Trust (REIT).  A REIT is a essentially a company that owns one or more strip malls, big box store properties, apartment buildings, seniors housing, commercial properties, etc. 

REITs are similar to Income Trusts in that they typically pay a higher distribution than a common stock. 

Note that if you own a home, then you already have some real estate in your portfolio. You can also have rental properties.  It is debatable as to how to include the value of your own home in your overall portfolio. For myself I choose NOT to include it in my overall portfolio mix at all (as I never want to be without a home!). If you do own a rental property then you need to consider  this in your overall asset mix.

Mutual Funds

If you are going to be investing on your own, you’re probably not going to be using mutual funds. Why? Because there are better alternatives…namely common stock, ETFs, income trusts and REITS.   

To sum up why, in a Globe and Mail article from June 9, 2010 titled ‘Canadian mutual funds lag index, again” by David Berman, the following text was taken:

The latest scorecard for mutual fund performance during the first quarter is out, which again makes for interesting reading. Standard & Poor’s found that only 40 per cent of actively managed Canadian equity mutual funds beat the S&P/TSX composite index, and the longer the time horizon, the worse the beat-rate.

Over three years, just 10.9 per cent of funds beat the benchmark index. Over five years, a mere 3.3 per cent of funds beat the index. The S&P approach corrects for survivorship bias, essentially taking into account funds that shut down.

That’s my bold above (and sorry I don’t have a reference to the actual S&P report itself).  I’ve seen similar numbers time and time again over the years. Unless your are extraordinarily lucky and happen to be in the right mutual funds, you would have been better off buying the index that the mutual fund is attempting to beat. And it IS possible to do this very easily with a special type of stock called an ETF (mentioned above). 

Why can’t mutual funds beat their benchmark index? There are lots of reasons and theories but a large part is due to the fact that mutual funds are actively managed.  This means there is a middle man involved who needs to be paid which translates into something called the Management Expense Ratio (MER) – usually in the 2 to 3% range – which goes to them and not you.

If you are currently invested 100% in mutual funds, don’t panic! I was once too. There are a lot worse things you could be doing with your money, so stay calm. You’ve seen the light and are now on your way to taking control over your investments. 

Closed-End Funds

Closed-end funds are like mutual funds except whereas mutual funds can have any number of units (known as an open-ended fund), closed-ended funds have a fixed number of units. Closed-end funds traded on a stock exchange like a stock and can be valued at a premium or discount to it's NAV (Net Asset Value). For me, the fact that in some cases the closed-end fund can be at such a discount to NAV (e.g. 20-30%) makes these investment vehicles interesting.  For example, you may purchase the fund at a 30% discount yet receive dividends on the full value of the fund. As a result your dividend yield is much higher than if the funds individual stocks had been purchased normally.

Further Related Links and Articles

A Primer on Closed-end Funds - Million Dollar Journey

E-Series Funds

There are a few exceptions to this rule. As of this writing, TD bank has a special type of mutual fund call the e-series funds which appear very attractive as they have low MERs. One nice feature of these is that because it is a mutual fund you can have money automatically added to these funds every month, probably for free, and when you have enough money accumulated in one of these funds you could purchase the equivalent ETF (which is likely even cheaper to own).

So if you are a TD customer, you may be in luck:

Other banks may have these now as well...let me know!

Further Related Links and Articles

Preferred Shares

Preferred shares are similar to common stock but are called ‘preferred’ because their dividend must be paid before the common stock is paid.  Well that part sounds good but they are actually quite complicated. Preferred shares have terms related to duration, redemption and a host of other features that make them difficult to get a handle on. 

I personally don’t deal with preferred shares. For myself, I feel as though there will be a place for them in my portfolio one day…just not today. 

Example: Bank of Nova Scotia Preferred Shares:,1608,CID1031_LIDen,00.html

For more information, you can start looking here:

Further Related Links and Articles

American Depositary Receipts (ADRs)

ADRs trade on US stock exchanges and are essentially the same as common stock - the main difference being that the corporations are not US based.

Further Related Links and Articles

A Primer on American Depositary Receipts (ADRs) - Million Dollar Journey