Many types of investments are available, ranging from those which will protect and retain capital, to the more aggressive derivative securities. Investors select investments for various reasons including income, capital growth or the favorable tax treatment for Canadian dividends and rents.

Today, investors search beyond local markets for higher returns and foreign market diversification opportunities. Diversification, plays an important role in lowering risk through the development of a portfolio which includes a number of different asset classes.

There are numerous ways to classify investments.

1) An investment can be purchased in different forms.

An investor can purchase a financial asset or a real asset. A financial asset can be defined as an investment instrument or a security, which represents capital invested into either the debt or equity of a company. Real assets represent an investment in real estate or other tangible property.

2) An investment can be either marketable or non-marketable.

A marketable investment is one for which a secondary market exists and in which assets can be purchased or sold easily.

A non-marketable investment has no secondary market.

3) An investor can invest either directly or indirectly.

An investment is direct when the investor acquires a claim on a specific security.

An indirect investment results when an investment is made in a pool of assets.

4) Investments can be classified according to their profiles.

A debt investment results when an investor becomes a creditor, receives evidence of the debt (the promise of the repayment of principal at a specified time), and the debtor contracts to pay interest in the interim.

An equity investment represents a residual ownership claim in a specific equity or property. The value of derivatives depends upon an underlying asset.

5) Investments can be classified according to their perceived level of risk.

For example, an investment may be low-risk or high-risk.

Risk is the probability that an investment's actual return will be less than the anticipated return.

Speculation is considered to be high-risk. An investment is called speculative if the earnings, cash flows, or future values from the investment are uncertain. Risk-free investments do not exist in the marketplace. However, federal government securities are often used as a proxy for a risk-free investment.

6) The investment horizon might be short or long-term. Long term to an active futures trader has a different meaning than to a bondholder.

Generally, in the bond markets short-term identifies investments with a maturity of from one to three years. Three to ten years is considered to be medium-term and long-term for Canadian government bonds can mean maturities of up to thirty years. Some new corporate debt recently issued in the U.S. bond market matures in 100 years. Furthermore, investments in common or preferred shares are valued as perpetuity's since they have no maturity dates.

7) An investment can be either domestic or foreign.

Domestic investments include debt, equity, derivatives, or property located in Canada.

Foreign investments are similar types of investments located outside of Canada.

1. Return. The components of return.

Returns from investing are critical to investors. An analysis of return is the only rational way for investors to monitor the results of an investment decision. The determination of historical returns allows an investor to compare alternative investments that differ in what they promise for the future and at what risk.

Total return is the sum of the current income and the capital gain or loss earned on an investment over a specific time frame. Expected return is the return an investor believes will be earned over the holding period of an investment.

Yield is generally considered to be the return on an investor's original capital.

A paper return is a profit not realized until the investment is disposed of.

Alternatively, realized return is the measurement of the current income (interest and dividends) actually received by an investor over a specified time frame.

The holding period is the period of time over which an investor actually owns an investment. Holding period return (HPR) is the total return (realized plus unrealized income) earned from holding an investment for a specified period of time.

2. Liquidity. Liquidity is the ability to readily convert an investment into cash, with little or no loss in value.

3. Marketability. Marketability considers the higher demand that certain investments enjoy over others. For example, in some real estate markets a house is more marketable than a condominium. Common stock is more marketable than preferred stock.

4. Personal management required. This refers to the time and personal supervision that are required to manage an investment.

5. Term. Term refers to the specific period of time an asset is held, e.g., long-term or short-term. The term can also refer to whether or not an investment is subject to restricted access, or is locked in for any time periods.

6. Purchasing power. Purchasing power is defined as the ability to preserve purchasing power of the investment capital.

7. Tax considerations. This refers to the tax treatment and after-tax retention of different types of investment income.

8. Risk. The measurable degree of uncertainty associated with a situation or event in which there is exposure to possible loss. In finance, the terms risk and uncertainty are frequently used interchangeably however, risk is different than uncertainty. Risk is measurable while uncertainty is not measurable.

Accounting risk is encountered in the selection and application of accounting methods, including management's ability to manipulate the output of the accounting process.

Actuarial risk is the risk that an insurance company underwrites for a premium, e.g., pure cost of insuring the risk of premature death.

Business risk is the degree of uncertainty of income and cash flows caused by doing business in a particular industry.

Country, political or sovereign risk is the uncertainty of returns caused by the possibility of a major change in the political or socioeconomic environment of the country.

Economic risks exist in a company's operating environment. Economic risks would include fluctuations due to the business cycle, changes in interest rates, and purchasing power risk.

Event risk is the risk that results from an occurrence which is unplanned and significantly affects an investment's value.

Exchange rate or currency risk is the variability of returns resulting from currency fluctuations.

Financial risk is the risk associated with the use of leverage in a corporation's capital structure. Additionally, financial risk includes the company's ability to meet fixed charges.

Inflation or purchasing power risk is the likelihood that a decline in purchasing power of invested capital will result from changing price levels in the economy such as inflation or deflation.

Interest rate risk is the risk that changing interest rates will affect the value of a fixed-rate debt instrument.

Liquidity risk is the risk associated with the inability to sell an investment easily. Liquidity risk is linked to the secondary market in which the investment trades.

Market risk is the variability in returns due to systematic market factors.

Psychological risk is the risk of making impulsive decisions at the wrong time, and for the wrong reasons.

Principal risk is the probability of losing investment capital.

Reinvestment risk is the likelihood that market interest rates will decline causing the reinvested cash flows from an investment to earn less than the initial reinvestment rate.

Systematic (non-diversifiable) risk is risk that cannot be diversified away. This risk influences a large number of assets and therefore, is also called market risk.

Total risk is the sum of an investment's non-diversifiable and diversifiable risks.

Unsystematic (diversifiable) risk is non market related and it is specific to an individual company or asset. Unsystematic risk can be virtually eliminated by portfolio diversification.

Credit, default or repayment risk is the exposure faced by a lender or creditor that the borrower will not repay an obligation as promised.

Interest rate risk is the possibility of a change in the price of a fixed income security which results from changes in market interest rates.

Reinvestment rate risk is part of interest rate risk. Reinvestment rate risk results from uncertainty about the rate at which future interest coupons can be reinvested.

Inflation risk is the likelihood that the real return of the fixed-income investment will be less than the nominal (dollar) return. Inflation risk is referred to as the risk of unanticipated increases in future inflation.

Maturity risk indicates that the further into the future an investor goes in purchasing a long-term security, the more risk there is in the investment, other factors being equal.

Call risk to a bondholder is the probability that higher coupon bonds will have to be sold back to the issuer.

Diversification is a risk management technique that provides insurance against the unexpected. The rule of thumb for diversification is to combine investments which have low or negative correlations to eliminate specific risk in a portfolio until only market risk remains.

When only market risk remains in a portfolio, options and futures can be used to hedge these risks.

Diversification has an effect upon portfolio return. Diversification reduces risk but it also reduces a portfolio's maximum return. Diversification lessens the pressure to sell a particular holding and therefore, diversification increases trading flexibility by extending the investors time horizon.

In the strategic approach to portfolio management there may be several levels of diversification.

1) how should the portfolio be apportioned between asset classes? Diversify by asset class.

2) how should the portfolio be divided within each asset class? Diversify within each asset class.

3) what percentage of the portfolio should be invested outside of Canada? Diversify geographically.

The Office of the Superintendent of Financial Institutions (OSFI) was established by legislation that merged the Department of Insurance and the Office of the Inspector General of Banks. This legislation established a single agency responsible for the regulation and supervision of Federally Regulated Financial Institutions (FRFIs). OSFI is also responsible for monitoring federally regulated pension plans. Other financial institutions and pension plans are provincially incorporated and are therefore not regulated by OSFI.

FRFIs include all banks, all federally incorporated or registered insurance, trust and loan companies, cooperative credit associations, and fraternal benefit societies. Although legislation, regulation, guidelines and policy statements affect how FRFIs conduct their business, day-to-day operations are not subject to government oversight. FRFI legislation and regulations are available at the Department of Justice's WebSite.

OSFI does not regulate the Canadian securities industry.

In Canada, the regulation of the securities business is a provincial responsibility.

Regulation of primary and secondary securities markets has important consequences for investors.

The primary market is the market for new issues of securities, typically involving underwriters and corporate issuers.

The secondary market is the market where previously issued securities are traded, including both the organized exchanges and the over-the-counter (OTC) network. The OTC market is a network of securities dealers for the trading of securities not listed on other exchanges.

Without the existence of an extensive investment dealer community and efficient and orderly security markets, the costs and risks involved in the issuing of securities would rise.