A Guaranteed Investment Certificate or GIC is a Canadian investment that offers a guaranteed rate of return over a fixed period of time, most commonly issued by trust companies or banks. Due to its low risk profile, the return is generally less than other investments such as stocks, bonds, or mutual funds.
Overview
GICs can be Registered or Non Registered, and come in many forms, from conventional term deposits to market investments. GIC's regularly have lifespans of 6 month, 1, 2, 3, 4, 5 or 10 year terms. To own a GIC you must deposit at least $500.00. At maturity they can be cashed as taxable income or renewed for another term. For most GICs, if you withdraw money before the term is done, you will not be paid any interest and may even be required to pay a fee. Usually, regular term deposits for financial institutions carry an interest rate from 1-9% depending on the various factors, such as the length of the term and specified interest rates from the Bank of Canada.
Example:The current interest rate is 3% - For every $100.00 I invest, I receive $3 in interest. I invest in a 3 year GIC with $1000.00 I receive $30.00 the first year, now I have $1030.00 in my GIC. The next year, I get $30.90 in interest. I now have $1060.90 in my GIC. In the third year the interest rises to $31.83. My GIC is done now and I have gained $92.73. If I want, I can renew my GIC to gain more money.
However, other GICs such as Market Growth GICs or Market Stock-Indexed GICs have their interest rates determined by the rate of growth of a specific stock market (such as the TSX or S&P 500). For example; if the TSX has a market growth increase of 30% in 3 years, beginning at the same point in time the GIC was issued, the GIC will return with an interest of 30%. However, unlike other GICs there is always a possibility that the market could perform poorly, having even no growth at all, in which the interest rate could return at 0%. Just like regular GICs, Market Growth GICs are extremely low-risk; your capital is guaranteed to remain intact (though the purchasing power is not), even if the stock market shrinks.
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