As you begin to grow and diversify your investment portfolio, there are some key things you need to know about Guaranteed Investment Certificates (GICs). Make sure that you do your research well before investing—this way you will be sure that you are investing in the right type of products and that you will be able to get more benefits for your investment. It is better to be safe than sorry.
You are probably wondering, ‘what is a GIC?’ GICs are certificates are issued by Canadian financial institutions that are typically issued without any conditions in return for a set of investment documents that can be used as security for the loaned funds. These certificates can be flexible, and come with numerous terms and conditions that vary from institution to institution.
So, What’s the Catch?
When you deposit the money, it must be for a fixed length of time, and interest rates can vary according to the length of the commitment. Purchasing a GIC is lending the bank your money and making interest off of the money for lending it to them. Be aware if you take the money out before the term is up, there is a penalty.
Financial institutions that offer them are legally obligated to pay the principal and interest. And if the bank were to fail, the investor is insured by the Canadian Deposit Insurance Corporation (CDIC) for up to $100,000 CAD.
What do I Need to Get a GIC?
First of all, you need to know that you need to have a certain minimum percentage of asset value as collateral. The higher the risk, the higher the interest rate. So, you need to think carefully when choosing a GIC and make sure that you understand the terms and conditions. Also, in most instances, the interest rate charged will vary on how risky the investment might be. A GIC is typically a safe and smart investment for people who are looking for an additional income stream.
Are GICs Tied to the Stock Market?
There are GICs available that are tied to the stock exchange. These can offer low risk for a high return and are offered through a broker who sells stocks to you through your brokerage account. Using a broker could allow transparency with the exchange you are trading, since you know who you are dealing with as well as the type of stocks you will be purchasing. However, before you do this, you should do your research. By doing a bit of due diligence, you will be able to make sure you are getting yourself the best deal for your money.
Fixed vs. Variable: What Interests You?
A fixed interest GIC is issued to an individual at a fixed rate over a specific amount of time, usually for a short period of time. These types of policies are generally offered as retirement annuities by banks and financial institutions. You earn a certain percentage on the funds you deposit. When purchasing a fixed GIC, you are basically taking a loan out from the bank to pay the premiums over the duration of the policy. If you don’t have enough money to pay the premiums, you are unable to sell the policy or receive a refund.
Variable GICs, on the other hand, are issued as a variable annuity at an interest rate that varies from month to month. You have the choice to adjust the interest rate—however, you are not legally obligated to do so. This is done because it costs the bank more money to purchase the insurance in a fixed rate policy over a variable rate. If you opt to purchase a variable GIC, you will be charged additional interest based on your initial interest rate. If you change your interest rate at the end of the month, the extra interest will be applied to the remaining balance of your loan. If you choose to purchase a fixed GIC, you have the option to adjust the interest rate and there is no additional interest charged if you change the rate. This option, however, is not available with the variable GIC.
Where do I Get a GIC?
When searching for a fixed GIC, you can search online for the different companies that offer them or look through a local newspaper. While there are many different companies offering this type of insurance, it is important to make sure that the firm is licensed to sell them. You should also read all the fine print on the company’s website and make sure that it is accurate. Some companies are less than honest about the benefits and conditions associated with their policies, so make sure you do your homework.