Building Wealth with Ownership Investments in Canada
If you want your money to grow faster than the rate of inflation over the long term and you don’t mind a bit of a roller-coaster ride from time to time in the value of your investments, ownership investments are for you. Ownership investments are those investments in which you own an interest in some company or other types of assets (such as stocks, real estate, or a small business) that have the ability to generate revenue and profits.
Observing how the world’s richest people have built their wealth is enlightening. Not surprisingly, many of the champions of wealth around the globe gained their fortunes largely through owning a piece (or all) of a successful company that they (or others) built.
In addition to owning their own businesses, many well-to-do people have built their nest eggs by investing in real estate and the stock market. With softening housing prices in many regions in the late 2000s, some folks newer to the real estate world incorrectly believed that real estate is a loser, not a long-term winner. Likewise, the stock market goes through down periods but does well over the long term.
And of course, some people come into wealth through an inheritance. Even if your parents are among the rare wealthy ones and you expect them to pass on big bucks to you, you need to know how to invest that money intelligently.
If you understand and are comfortable with the risks, and take sensible steps to diversify (you don’t put all your investment eggs in the same basket), ownership investments are the key to building wealth. For most folks to accomplish typical longer-term financial goals, such as retiring, the money that they save and invest needs to grow at a healthy clip. If you dump all of your money in bank accounts that pay little if any interest, you’re likely to fall short of your goals.
Not everyone needs to make his or her money grow, of course. Suppose you inherit a significant sum and/or maintain a restrained standard of living and work well into your old age simply because you enjoy doing so. In this situation, you may not need to take the risks involved with a potentially faster-growth investment. You may be more comfortable with safer investments, such as paying off your mortgage faster than necessary.
Investing with Canadian Stock Exchanges
Stock exchanges are organized marketplaces for the buying and selling of stocks and other securities. The Toronto Stock Exchange, often referred to as the TSX, is one of the world’s larger stock exchanges by market capitalization. It offers a range of businesses from Canada and abroad. The TSX, like the New York Stock Exchange (NYSE) and Nasdaq, offers a wealth of free (or low-cost) resources and information on its websites for all stock investors.
There are peripheral exchanges to be mindful of as well. Formerly known as the American Stock Exchange, NYSE American is an exchange designed for growing companies. In Canada, other exchanges you may see in some newspaper business sections or online include the following:
- TSX Venture Exchange: This is a public venture capital stock market for emerging innovative companies that are not yet big enough to be listed on larger exchanges like the TSX.
- Canadian Securities Exchange (CSE): Considered to be an alternative stock exchange for entrepreneurs, it’s an option for companies looking to access Canadian capital markets. The CSE lists hundreds of micro-cap equities, government bonds, and other financial instruments.
- Montreal Exchange (MX): The MX is low profile in that it’s a derivatives exchange — a place to trade futures contracts and options.
- Nasdaq Canada: This is a subsidiary of the Nasdaq Stock Market in the United States. Its purpose is to ensure Canadian investors quick availability of all key information of all Nasdaq securities and the ability for companies to raise capital more efficiently.
- Aequitas NEO Exchange: The NEO Exchange, or NEO, aims to help companies and investors by creating a better trading and listing experience (for example, with free stock quotes and faster listing times).
The federal and provincial governments have been planning to create a national securities regulator, like the Securities and Exchange Commission in the U.S. (despite trying and failing to do this in the past). The objective is to create a single Canadian securities watchdog, rather than have a dozen or so separate securities regulators in the provinces and territories.
Assess Your Tolerance for Risk in Real Estate Investing
The risks associated with real estate investing stem from its disadvantages. Chances are you’re attracted to real estate and the stability it offers; after all, land isn’t about to get up and walk away, and they’re not making a whole lot more of it. But land also has its own limitations that can affect how you can use it and its value to investors. Some common risks include:
- Changes to surrounding properties and the local neighbourhood: More than likely, you know houses where the grass has grown long and shaggy, the curtains are faded, and newspapers sit yellowing on the front step. Now, imagine that house is right next door to your investment property. Or perhaps a few of them stand in the neighbourhood where you’re thinking of buying. Chances are you won’t find the neighbourhood as appealing. Changes in the condition of other properties can seriously affect the value of your own real estate, and may prompt you to try selling a property earlier than you had intended.
On the other hand, positive changes to nearby properties can boost the value of your property and even prompt you to make improvements that will keep up not only with the Joneses but also with the broader market.
- Changes in the political climate and government policies: Regardless of who forms the government, real estate investments may be subject to policy changes. A city council may need extra funding and pass a bylaw requiring owners of apartment buildings to pay significantly more for city services than homeowners. Some cities have introduced speculation and vacancy taxes, unheard of a decade ago. Or perhaps city staff are about to rezone the lot down the street for commercial development; depending on whether they allow a tea boutique or a bar with exotic dancers, your property is likely to see a change in value. Whether you can make the most of such changes will determine the success of your investment.
- Changes in the local economy: You’ve probably heard of ghost towns. When companies pack up and take the jobs with them, property values are sure to follow. A sudden change in the local economy can mean boom or bust for your portfolio. Are you able to anticipate the changes or find ways to meet them head-on when they occur?
The amount of risk you can accept and manage will determine the kind of property you purchase but also whether you purchase at all. Take a close look at your background and the skills you bring to the challenges of being an investor. Are you familiar with the risks you face, or will they be new challenges for you? They might help you to discover and develop new skills, but you don’t want to jeopardize your investment in the process. Becoming familiar with the risks you face — and recognizing when you need assistance, or even when you should reject an opportunity — is key to a successful investment.