Yesterday, the North American Securities Administrators Association (NASAA) released an investor alert and tips to help investors protect themselves, and assess the risks of peer to peer lending. (Before You Invest, as a blog of the Nova Scotia Securities Commission, is an active member of NASAA.)

NASAA’s investor alert urges potential lenders to consider the risk of the borrower defaulting on the loan. Peer-to-peer loans are unsecured; therefore, investors are dependent on the borrower to repay the loan and may have no legal ability to pursue the borrower in the event the borrower fails to pay. The notes issued to the lender are not CDIC-insured, nor are they guaranteed by any federal or provincial agency.

NASAA also advises investors to be aware that the identity of the borrower is often not available to the lender, making it impossible to verify independently the status of the borrower’s finances and business prospects. The lending platform may not do a thorough background check of the borrower, and borrowers may incur additional debts to other lenders.

Like any investment opportunity, when you see a peer-to-peer lending opportunity on the Internet, you should do your homework. Depending on how the loan is set up, you could actually be purchasing a security, not giving a loan. This security would be regulated by provincial securities laws, and the seller would be required to be registered with the Nova Scotia Securities Commission.

“It takes time to fully assess the risks and rewards of financial innovations such as peer-to-peer lending,” said NASAA President and North Carolina Deputy Securities Administrator David Massey. “Investors should proceed with caution when considering new investment vehicles.”

Read NASAA’s investor alert for more information peer-to-peer loans and assessing the risks of lending over the Internet.

Explain money market funds & how they work. Stocks I get, but currency funds? Buh?

OK. Good question.

To start, lets define a mutual fund.

A mutual fund is a type of investment fund where you buy “units,” and your money is pooled with the money of other unit holders. A professional fund manager invests this money on behalf of all unit holders, according to the investing guidelines of the fund. The main advantages are that you can invest in a variety of investments for a relatively low cost and leave the investment decisions to a professional manager.

With a money market mutual fund, the fund manager invests only in short-term (one year or less) debt securities, such as Canadian federal government treasury bills, federal government-guaranteed notes, provincial government treasury bills and promissory notes.

Money market products are often available only with large initial investments, but by pooling your money with others and investing in a money market mutual fund, you can invest in these funds with smaller amounts of money, or through a regular monthly or bi-weekly contribution. You can sell your units and access your cash within one business day, making them an ideal choice for a short-term place to stash your money for a short-term savings goal.

The terms saving and investing are often used interchangeably, but they mean different things. Saving is putting money aside for a future need. You may keep your savings in a bank account, a savings bond, a money market fund, or even (but not recommended) under your mattress or in a bedside drawer.

Savings are most commonly used for short-term needs such as upcoming expenses or emergencies. You  earn a low rate of interest on savings deposits and can withdraw your money easily.

Investing simply means putting your money to work so it can make more money. Investing involves taking some risk with your money, in hopes of making it grow.The amount of risk you are willing to take varies from person to person, based on your personal situation and beliefs. Generally, the more risk you are willing to take, the higher potential for growth.

For many Canadians, investing is not only prudent—it’s a necessity.The cost of education dramatically increasing. Fewer people are covered by employer sponsored retirement plans. Saving for retirement will likely be the biggest financial goal for most Canadians and investing is one of the few ways that can help them achieve it.

There are many different ways you can go about investing, including putting money into stocks, bonds, mutual funds and real estate (to name just a few). Each of these has pros and cons, which we discuss later month – or for more information check out our “Investments at a Glance” summer series.

A labour-sponsored investment fund (LSIF) is a fund that provides venture capital to new and small businesses and offers tax incentives to investors. LSIFs are issued by labour organizations or financial institutions.

These funds are riskier than traditional mutual funds, and tax credits may not be enough to offset any losses.

LSIFs have a hold period, which can be as long as eight years. If you sell your fund before the end of the hold period, you may lose your tax credits. In Ontario, the tax credit for LSIFs will be eliminated at the end of the 2011 tax year.

LSIFs incur mostly the same costs as mutual funds, although commission rates may differ from traditional mutual funds. In addition to management fees, some LSIFs also pay the manager an incentive fee.

Commodity pools are funds that invest in derivatives or commodities that conventional mutual funds are not permitted to invest in. Some commodity pools are highly speculative and have higher risk than traditional mutual funds. You could lose most or all of your investment.

Thanks for reading our Investments at a Glance series! We will be putting it aside for a few weeks, but will bring it back from time to time, to answer questions or add additional information.

A closed-end investment fund is a fund that issues a limited number of units or shares, which may trade on a stock exchange.

It may be difficult to buy or sell some closed-end funds if they are not listed on an exchange or they have a low volume of trading activity. As with mutual funds, the level of risk and return depends on what the fund invests in.

An exchange traded fund or ETF is, quite simply, an investment fund that trades on a stock exchange (sometimes these names really are self-explanatory). ETFs typically follow an index but some are more actively managed.

The fees and expenses for an ETF are often lower than what you would pay for a traditional mutual fund. If an ETF simply follows an index, the manager doesn’t have to do as much research into investments or as much buying and selling of investments. The level of risk and return depends on what the fund invests in.

Segregated funds combine investments with insurance coverage, and are issued by insurance companies. The assets are held separately from the insurance company’s other assets.

You buy and sell segregated funds under an insurance contract. The contract comes with a guarantee that protects some or all of your investment if the markets go down. You generally have to hold the contract for 10 years to get this guarantee.

Contracts usually have a death benefit that guarantees the amount your beneficiaries will receive.

You pay similar fees as with mutual funds, but with an annual insurance cost as well.

This was the eleventh post in our Investments at a Glance series. Next, we close the series with a look at commodity pools and labour sponsored investment funds.

Investment funds are a collection of investments from one or more asset classes. Each fund focuses on specific investments, like government bonds, stocks from large companies, stocks from certain countries, or a mix of stocks and bonds.

When you buy an investment fund, you’re pooling your money with many other investors. The main advantages are that you can invest in a variety of investments for a relatively low cost and leave the investment decisions to a professional manager.

Investment funds can be set up as trusts, corporations or partnerships. They are issued in units if they are set up as a trust or partnership, and shares if they are set up as a corporation. Returns can include distributions to investors of dividends, interest, capital gains or other income earned by the fund. You can also have capital gains (or losses) if you sell a fund for more (or less) than you paid for it.

The most well known type of investment fund is a mutual fund. A mutual fund is a fund that continually issues units or shares to investors.

Mutual funds are widely available through investment firms, fund companies and banks, and are easy to buy and sell. When you buy or sell units or shares of a fund, you receive the current value of the fund. This is called the “net asset value” or NAV.

You may have to pay fees to buy or sell your fund, switch between funds, or fees to hold funds in a registered plan. The fund pays management fees, operating expenses (or a fixed administration fee), trailing commissions (paid from management fees) and incentive fees. The fees and expenses a fund pays are deducted from the fund’s assets. They reduce the returns you get on your investment.

The level of risk and return involved depends on what the fund invests in: lower for a fund investing in fixed income, higher for an equity mutual fund. Mutual funds are not guaranteed.

As a fund owner, you have the right to vote on major decisions about the fund.

This was the tenth post in out Investments at a Glance summer series. Stay tuned for a closer look at segregated funds, closed end funds, and exchange traded funds.

Resource exploration and development programs are generally high risk. In addition, there is a risk that the company’s expenditures may not meet the strict requirements of the tax legislation. Tax deductions may not be allowed.

Rights and warrants give the holder the right to buy additional securities from a company at a certain price within a certain period of time. They are usually issued in proportion to the number of shares an investor owns.

Rights allow shareholders to acquire more shares. Some rights are listed on stock exchanges. They may not trade actively. In some cases, rights may have resale restrictions or holders may be subject to restrictions on their ability to exercise the rights to acquire additional shares.

Warrants allow shareholders to acquire other securities of the company. They are typically offered to investors with the sale of another security, like a common share. Rights and warrants have similar risk and return considerations as options.

This has been the ninth post in our Investments at a Glance series. Coming up next: the exciting world of investment funds.

When you own common shares you have the right to elect directors and to vote on certain major corporate decisions. You gain (or lose) money based on the company’s performance. Companies do not have to pay a dividend. Many larger, established companies try to pay regular dividends. Others may not pay a dividend because they are not profitable or they choose to reinvest their earnings.

Restricted voting shares are generally the same as common shares, but (as expected) the voting rights of the holder are restricted.

Preferred shareholders generally do not have voting rights, but may be offered special features such as the right to redeem their shares at certain times or to convert their shares to common shares at a certain price. Preferred shares pay a fixed dividend, though a company may reduce or suspend dividend payments if, for example, it does not earn enough profit or needs to preserve its capital.

In general, the prices of preferred shares tend to fluctuate less than those of common shares. However, the prices of preferred shares may fall if:

• the company plans to reduce or reduces dividends
• the rate of return of other investments increases, making preferred shares relatively less attractive

If a company dissolves, preferred shareholders have a right to receive up to the face value of their shares from the company’s remaining assets. They rank behind tax authorities, employees and creditors but ahead of common shareholders, who also have a right to a portion of the remaining assets.

This has been the eighth post in our Investments at a Glance Series. Next we examine flow-through shares, rights and warrants.

The most common type of equity investment is a stock or share. You can make money on a stock in two ways: if the shares increase in value and/or if the company pays a dividend. It is important to remember that there are no guarantees either will happen.

The value of a share can go up or down—sometimes frequently and sometimes by a lot. Factors such as the size, profitability and financial stability of the company, the capability of its management team, general economic conditions, competition and exposure to things like foreign currency risk can all affect a share’s value.

You have not officially gained or lost money on a stock until you sell it. If you sell a stock for more than you paid for it, you will have a capital gain. If you sell it for less, you will have a capital loss.

Compared to fixed income investments, stocks can provide relatively high returns, but you may also have a higher risk of losing some or all of your investment.

Shares are normally traded on stock exchanges, on alternative trading systems or through dealer networks known as over-the-counter (OTC) markets. Shares that trade on stock exchanges are usually quite easy to sell. Shares that do not trade on stock exchanges are often difficult or even impossible to sell.

This has been the seventh post in our Investments at a Glance summer series. As we continue our series next week, we will look at various kinds of shares and related equity investments.

As discussed in the previous post, there are two parts to a bond: the principal or value of the bond, and the interest. With stripped bonds (strips) the interest payment coupons and the principal portion of a bond have been separated from each other, and are sold as individual investments. Terms typically range from 18 months to 30 years.

Strips are sold at a discount and mature at face value. The difference is your interest income. The longer the term to maturity, the deeper the discount.

So, for example, I may buy the principal portion of a bond, paying $10,000 for a $11,000 bond. The $1000 is my interest income, giving me a 10% yield.

Strips generally have higher yields than regular bonds with similar terms and credit quality. Because the income you earn is deferred, you should seek tax advice before investing in strips outside a registered plan like a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF) or Registered Education Savings Plan (RESP).

When you buy mortgage-backed securities (MBS), you are buying an ownership interest in a pool of mortgages. Terms typically range from one year to 10 years.

MBS offer fixed rates of return and usually make monthly income payments. The monthly payments are made up of a share of the interest and principal payments associated with the mortgages.

MBS are fully guaranteed by the Canadian Mortgage and Housing Corporation (CMHC).

This has been the sixth post in our Investments at a Glance series. Next time, we begin to look at equity investments.

Interest is usually paid at a fixed rate, determined when the bond is issued. The rate will depend on interest rates and the credit rating of the issuer at the time the bond is issued. For example, the rate will be relatively higher if there is a greater risk that the issuer will default on its payment obligations.

If the company is dissolved, bondholders have a right to a portion of the company’s remaining assets. They rank behind tax authorities, employees and creditors but ahead of preferred and common shareholders.

A debenture is a loan to a company that is not secured by specific assets, but may be secured by the issuer’s general assets. Debentures work the same way as bonds.

The face value is the value the fixed income security was issued at and is the value you receive when it matures. Interest payments are based on the face value. For example, a bond that has a face value of $1,000 and an interest rate of 5% would pay you $50 a year.

Fixed income securities may be bought and sold at a price higher or lower than their face value. The value of a fixed income security will fluctuate as interest rates change. For example, if interest rates go down, the value of a bond would normally go up because its relatively higher fixed interest payments are more attractive to investors. Changes in the credit rating of the issuer can also affect the value.

You can make money if you sell a fixed income security for more than you paid for it (capital gain) or lose money if you sell it for less (capital loss). The actual return or “yield” that you earn on a fixed income security depends on the price you pay for it and the time remaining until it matures.

For example, a bond with an interest rate of 5% will pay you $50 a year for each $1,000 in face value. If you buy the bond for $950, your actual rate of return will be higher than 5%. If you buy the bond for $1,050, your actual rate of return will be lower than 5%. Calculating the yield precisely can be complex but a financial adviser can do this for you.

Many fixed income securities come with a guarantee and are relatively safe. They tend to offer better rates of return than cash equivalent investments because you’re taking on more risk by lending out your money for a longer period. Other fixed income securities, like “junk” bonds, offer much higher rates of return, but they can be very risky and have no guarantees.

Most fixed income securities are sold through investment dealers.

This has been the fourth post in our Investments at a Glance summer series. Next week, we look at specific types of fixed income securities, bonds and debentures.

A guaranteed investment certificate (GIC) is a deposit certificate issued by a financial institution

GIC terms typically range from 30 days to 10 years. You can buy them at banks, trust companies and credit unions. There are no fees or commissions involved in the purchase of GICs.

Most GICs pay a fixed rate of interest. Some GICs are linked to a stock market index, and the rate of return may vary based on the index’s performance of an index.

GICs are guaranteed by the issuer. The principal may be insured up to certain limits by a deposit insurance agency like the Canada Deposit Insurance Corporation. As a result, there is very little risk that the principal will not be repaid. However, if the GIC’s return is tied to an index, there may be a risk that interest payments will be lower than expected or there may be no interest payments at all.

Most GICs must be held to maturity but some may allow you to redeem early, though you may have to pay a fee to do this.

A money market fund is a mutual fund that invests in short-term fixed income securities.

Money market funds are usually issued at a fixed price of $10.00 per unit or share. The return you receive will vary depending on the investments the fund holds. In general, returns follow current short-term interest rates.

Most money market funds are usually low risk because they invest in high quality short-term securities. Others may invest in riskier securities to increase returns.

We will talk more specifically about how mutual funds work in future weeks, when we get to discussing investment funds.

These investments include savings bonds, T- bills, GICs, and money-market mutual funds.

A savings bond is a loan to a government that is secured by the general credit and taxation powers of the government.

Savings bonds offer terms of one year or more. You can buy them from most banks, trust companies, credit unions and investment dealers. They are usually offered for sale at certain times of the year. There may be limits on how much you can buy.

Most savings bonds guarantee a fixed rate of interest for each year to maturity. Some have a minimum rate of interest that can be increased by the issuer if market conditions change.

There is virtually no risk of default because savings bonds are guaranteed by the government that issued them.

Some savings bonds must be held until maturity. Others let you redeem at any time or only at certain times, for example, every six months. You generally can’t sell or transfer your savings bonds to someone else.

Treasury bills, or T-bills are short-term loans to a government. Terms are less than one year. T-bills are usually sold in large denominations. You buy them from an investment dealer. Commissions are built into the price of the T-bill.

T-bills do not make interest payments but are sold at a discount and mature at face value. The difference is your interest income.

There is virtually no risk of default. The short-term nature of T-bills means there is low risk that changes in interest rates will cause their market value to change significantly.

You can’t redeem a T-bill before maturity but you can easily sell it back to the investment dealer. However, this may result in a lower rate of return.

This was the second post in our summer Investments at a Glance series. Next week, we look at more cash equivalent investments: GICs and money market funds.

We will look at investment classes, including cash, fixed income, equities and alternative investments, and take a closer look at some of the more common types of investments you might encounter.

Before you invest, make sure you understand how an investment works, including any fees, and whether it fits with your goals and risk tolerance. With investing, the higher the potential return, the higher the risk. There’s no such thing as a high return, risk-free investment. If you want higher returns, you have to be prepared to accept the risks that go along with them.

Income tax is another important consideration. Interest, dividends and capital gains are all treated differently for tax purposes and that will affect your return from an investment. A registered adviser can help you assess your financial needs, goals and tax situation. An adviser can also help you build a portfolio and recommend suitable investments for you.

Whether you have an adviser or invest on your own, don’t invest in anything that you don’t fully understand. Take your time when making investment decisions and never sign documents you have not read carefully.