Investing basics: stocks, bonds, funds and fees

🔴 Advanced · Step 16 of 22 · Topic: Investing & Tax-Free Accounts

In one sentence

This post explains the main things you can invest in, why spreading your money out lowers risk, and how a yearly fee called the MER can change your result by thousands of dollars.

Words to know

Stock (or share): a small piece of ownership in a company.
Bond: a loan you give to a government or company. They pay you interest and return the money later.
Fund: a basket that holds many stocks, bonds or both. You buy one piece of the whole basket.
Diversification: spreading your money across many investments, so one bad one does not hurt too much.
MER (management expense ratio): the yearly cost of owning a fund, shown as a percent of your money.

Step 1: Understand stocks and bonds

Stocks. When you buy a stock, you own a tiny part of a company. If the company does well, the stock price may rise. Some companies also share profits with owners. This payment is called a dividend. If the company does badly, the price can fall a lot. Stocks can grow more over the long term, but they move up and down more.

Bonds. When you buy a bond, you lend money. The borrower pays you interest. At the end, they pay back the loan. Bonds usually move less than stocks. They usually grow less, too. Bonds can still lose value, for example when interest rates rise.

Many people hold a mix of both. More stocks means more growth potential and bigger swings. More bonds means a smoother ride.

Step 2: Learn the types of funds

Buying one stock at a time is hard and risky. Funds make it easier.

Mutual fund: a fund run by a company. You buy and sell units through a bank, advisor or fund dealer. Many are “actively managed”. This means a manager picks the investments and tries to beat the market. This often costs more.
Index fund: a fund that simply copies a market index. An index is a list of companies, like the biggest companies on a stock exchange. There is no stock picking, so costs are usually lower.
ETF (exchange-traded fund): a fund you buy and sell on a stock exchange, like a stock. Most ETFs follow an index. You need a brokerage account to buy them. We cover this in Step 17.

Some funds hold both stocks and bonds in one package. These are often called “all-in-one” or “balanced” funds. They can be a simple choice for beginners.

Step 3: Spread your money out (diversification)

If you put all your money in one company and it fails, you can lose most of it. If you own hundreds of companies, one failure is a small part of the whole.

You can diversify in several ways:

Many companies, not just one or two.
Different industries, like banks, energy, technology and health.
Different countries, not only Canada.
A mix of stocks and bonds.

One broad index fund or ETF can hold hundreds or even thousands of companies. That is diversification in one purchase.

Step 4: Check the fees before you buy

Every fund has a yearly cost called the MER. You don’t get a bill for it. It is taken from the fund’s money, so your return is already lower by that amount.

A fee of 2% sounds small. But it is taken every year, on all your money. Over many years, it adds up a lot. You can find a fund’s MER in its “Fund Facts” or “ETF Facts” document. Look for it before you buy.

Also ask about other costs:

Sales charges when you buy or sell.
Trading commissions at a brokerage.
Account fees or advisor fees.

Example

Let’s compare two funds that hold the same kind of investments. The only difference is the fee.

Assumptions (for illustration only, not a prediction):

You start with $10,000 and add $200 at the end of every month.
You invest for 20 years (240 months).
The investments earn 6% a year before fees, every year.
The fee is taken from the return. So Fund A earns 6% − 2.0% = 4.0% a year. Fund B earns 6% − 0.25% = 5.75% a year.
Growth is added every month, at the monthly rate that equals the yearly rate. There are no taxes (for example, inside a TFSA).

Money you put in: $10,000 + ($200 × 240 months) = $10,000 + $48,000 = $58,000. This is the same for both funds.

Value after 20 years:

Fund A (2.0% MER): about $94,680
Fund B (0.25% MER): about $118,780
With no fee at all (6%): about $122,760

The difference: $118,780 − $94,680 = about $24,100. The higher fee costs you about $24,100 of your money. That is more than twice the $10,000 you started with.

A simple way to see it in one year: on $10,000, a 2.0% MER costs $200 ($10,000 × 0.02). A 0.25% MER costs $25 ($10,000 × 0.0025). That is $175 more each year, and the gap grows as your money grows.

A higher fee can be fine if you get real value, like advice you use. Just know what you pay.

Common mistakes

Buying one or two “hot” stocks instead of spreading money out.
Not knowing the MER of the funds you own.
Thinking bonds or funds can never lose value.
Buying an investment you can’t explain in two sentences.

✅ My checklist

☐ I can explain the difference between a stock and a bond
☐ I know what a mutual fund, an index fund and an ETF are
☐ I understand why diversification lowers risk
☐ I found the MER in the Fund Facts or ETF Facts before buying
☐ I asked about all other fees

Next step → Step 17: How to start investing: robo-advisor, DIY or bank advisor

More in this topic → Investing & Tax-Free Accounts

There are no affiliate or referral links in this post. This is general information, not financial, tax or legal advice; everyone’s situation is different. Figures were checked in October 2026 and can change.

Sources: Fidelity Canada: Management expense ratios explained