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An investment is something you get with the goal of having it grow in value over time.

This simple definition contains some basic but important financial literacy concepts.

  • something you get: When you invest, you get something by giving up something you have. Usually you give up money, but you might give up your time.
  • goal: When you invest, it is not a “sure thing.” Like any goal, the goal of growth might or might not be reached.
  • grow in value: You invest so that you will have something worth more than what you have now.
  • over time: Your investment needs time to grow. The length of time you are willing to wait could be several months or many years.

We will be talking about financial investments in this guide. But financial investments are not the only way to have something that is worth more later than it is worth now. Your house, your jewelry or even a special trading card collection can grow in value over time. Getting an education or bettering yourself in some other way are also investments. We won’t be talking about those here, but these examples can help you understand the idea of investing.

When you are thinking about investing, it is important to do what is right for you. The goal of any investment is growth in value, but only you know what you want to do with that extra money. You might want to buy a house, help your children go to university, or create a nest egg for retirement. How long you are willing to wait for an investment to grow and how much risk you are willing to take will depend on the goal. So, the way that you invest and what you invest in will also depend upon this.

Types of Financial Investments

Different types of financial investments will make your money grow in different ways:

  • You can deposit your money in a bank savings account that pays you interest.
  • You can loan your money out for a short or a long time and earn interest.
  • You can become a part owner of a company and get a share of the money it makes.
  • You can sell your share of a company for more than you paid for it.

When your money grows through an investment, that growth is called the “return on investment.”

This video gives a good overview of investing. It is from the Nova Scotia Securities Commission (NSSC), the government agency that helps to protect investors in Nova Scotia.

You can also read NSSC’s overview of investing in this blog post.

pdf Investing NSSC (142 KB)

Investments Which Earn Interest

The simplest type of investment is one where you let someone use some of your money, and they pay you the full amount back plus a little bit extra. You own the money, but you’re not using it. So, you let someone else use it, and you charge them a little bit to use your money. The little bit is called “interest,” and it is your return on investment.

Examples of this type of investment include:

  • a savings account in a bank
  • a guaranteed investment certificate
  • a government savings bond

If you are like most people, the word “interest” might make you think more about borrowing money than investing it. If you borrow money, you must pay it back.  And you pay interest. Until you pay it back, you have“ debt.” It might help you to think about investments with interest as the exact opposite of debt.

In each of the examples above, the person or company on the other side of the investment has borrowed from you, the investor. The borrowers have debt because now they owe you money. You have an investment, because you are owed the money back. The amount you loan them, or invest, is the same as the borrower’s debt, or the amount the borrower owes you. In the same way, the amount of interest they will have to pay is the amount you will get. Their cost of borrowing is your return on investment.

Investments that pay interest are sometimes called “deposit-type” investments.  This is because you are depositing money to make a return.  Let’s talk about some examples.

When you have a savings account, you have an investment and the bank has a debt. In other words, you are loaning the bank some of your money.

If you have a guaranteed investment certificate (GIC), it is an investment to you, the owner of the GIC. It is a debt for the financial institution you got it from. Financial institutions are companies that are in the business of money and include banks, trust companies, loan companies, and insurance companies.

On the other hand, you probably know that a mortgage is a special kind of loan that you can get to buy a house. If you have a mortgage for your house, it is debt to you. But that mortgage is an investment to the bank that loaned you the money.

How Interest Works

We said interest is what you earn when you let someone borrow your money. It is also what you pay when you borrow from someone else. How much interest you will earn or pay depends on three things:

  • the amount of money being loaned out or invested by the owner, known as the “principal”
  • the percentage rate of interest being charged, known as the “rate,” and
  • the length of time the money is loaned out or invested for, known as the “term.”

If you have ever borrowed money from a bank, you have seen these words before. As a borrower, you paid interest instead of earning it.

Interest rates are expressed as a percentage over a year. This is true even if the money is invested for days, weeks, months, or years. So, if you invest by loaning money for less than a year, you calculate the interest based on the part of a year the borrower uses the money.


If you invest $10,000 for one year at a rate of 10 %, you will earn $1,000 in interest and have $11,000 by the end of the year. Here is how you calculate the interest:

$10,000 (the amount you invest, also called the principal) x 10 % (the interest rate) x 1 (one year, the term of the loan) = $1,000 (your return on investment). Add the return on investment to the principal ($1,000 + $10,000 = $11,000) to get the amount you are owed at the end of the year. This $11,000 is the new value of your investment. Your investment has grown by $1,000, from $10,000 to $11,000, over the year.

If you invest $10,000 for one month at a rate of 10 % interest, you will earn $83.33 in interest, and your investment will be worth $10,083.33 at the end of the month. Here is the math:

$10,000 (the principal) x 10 % (the interest rate) divided by 12 (12 months in a year) = $83.33 (the return on your investment). Why divide by 12? There are 12 months in a year and the money was invested for 1 month, so you divide by 12 to find out how interest you will earn for 1 month.

Compound Interest

Sometimes interest is paid out every month or year during the term of the investment. This is called “simple interest.” But often, interest is not paid every month or year, even though it is being earned. Instead, no interest is paid at all until the time that the original money borrowed (the principal) is paid back. In these cases, the investor is also loaning the borrower the interest on the money, and the interest becomes part of the loan and investment.

Now both the principal and the interest are earning more interest.

This is how banks calculate your interest on your savings account. In this case, you are charging your bank interest on the principal and “interest on the interest.” As the investor, you are earning interest on the interest, while the borrower is paying the same interest on the interest. When interest is earned on interest, it is called “compound interest.”

Here’s an example:

You invest $10,000 for two years at a rate of 10 % interest.

With simple interest, the math is:

$10,000 (the principal) x 10 % (the interest rate) x 2 (the number of years for the investment) = $2,000. This would happen if you were paid the $1,000 of interest for the first year rather than reinvesting it. This means your $10,000 investment earned $1,000 ($10,000 x 10 %) in the first year and $1,000 ($10,000 x 10 %) in the second year. Interest was earned on the principal amount each year, but there was no interest earned on interest because the interest was not invested.

Interest graphic R

With compound interest, the math is:

Year 1: $10,000 (principal) x 10 % (interest rate) x 1 (year) = $1,000 in interest.

If you leave the $1,000 interest invested by not having it paid to you at the end of the first year, you will have $11,000 invested for the second year.

Year 2: $11,000 (principal plus invested interest) x 10 % (interest rate) x 1 (year) = $1,100 interest.

In Year 2, you earned interest on the interest from Year 1. By leaving the first $1,000 of interest earnings invested, you earned 10 % on this amount as well as on the original $10,000.

Interest graphic R2

Compounding can seriously increase the amount of interest earned over a long period of time. The longer the time you invest with compound interest, the greater the effect of compounding, and the more interest you earn.

Interest Comparison over time graphic

How often the interest on interest is calculated is called the "frequency of compounding.”  The more often the interest on interest is calculated, the more interest you will earn.  You can try your own examples of how compound interest works using this online compound interest calculator.

Compound Interest Calculator

The great Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

Compounding works with other types of investment returns as well. If you leave your returns invested, you will earn “return on your return.” This is why people are encouraged to start saving and investing as early in life as possible.

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