The Globe and Mail

Personal finance writer Gail Bebee and the winner of our investing quiz, whom we can identify only as Steve, are into their third week of mentoring. This time, Ms. Bebee writes him a letter detailing the joys and pitfalls of direct investing.

Dear Steve,

Direct investing accounts are custom made for people who want to take a more hands-on approach to investing. Instead of just buying funds, you can dig deep into the research offered by most discount brokers to select stocks, bonds, cash equivalent investments such as Guaranteed Investment Certificates (GICs) or even find the best place to keep any spare cash in your account.

Speaking of cash, you need to find a short term home for the $10,000 prize money sitting in your iTrade account without earning its keep. Fortunately, you can easily link your new account with a Scotia iTrade Cash Optimizer Investment Account. While it earns a paltry 0.75 per cent interest, the rate is competitive and it’s a safe place to park your cash short term. Your homework this week includes opening one of these accounts and getting your prize money working for you.

Gail Bebee's Investing Mentor program: How much risk can you stomach? Ask Gail Bebee How to pick a fund Diving into direct investing How to invest $10,000

Let’s take a look at some lower risk asset classes that belong in most portfolios—Guaranteed Investment Certificates (GIC) and bonds.

A GIC is a very safe deposit investment issued by a bank or credit unions. They offer a guaranteed interest rate over a fixed period of time, usually from 1 to 5 years and are insured by the Canada Deposit Insurance Corporation or equivalent credit union organization. Discount brokers sell their own brand of GICs, and often those from other financial institutions. The latter GICs usually come with higher interest rates and are probably your best bet.

More about GICs: Why GICs are better than stocks In praise of a much maligned investment Sleeping well with GICs Trifling GIC rates? Try a broker Tricks for getting higher GIC rates Buy GICs. Only GICs.

A bond is debt instrument. It is a way for institutions such as a government, utility or corporation to borrow money to buy new equipment, pay off existing higher interest debt, pay for an acquisition, etc. You lend the bond issuer a sum of money and it agrees to pay you fixed amounts of interest, called coupons, periodically and repay the amount borrowed (the principal) on a specific future date (maturity). Take a look at my GlobeInvestor article: Building a base with fixed income for details on the ins and outs of investing directly in bonds.

Most discount brokers include an overview on bonds and other fixed income in their educational material. If you hanker after an exhaustive treatment of the bond world from the Canadian viewpoint, In Your Best Interest: The Ultimate Guide to the Canadian Bond Market by W. H. (Hank) Cunningham (Dundurn, 2008) is probably our best bet.

Investor Education: Bonds How much do bonds pay? How can I diversify the bonds I buy? How do strip bonds, index bonds, and real return bonds work? How do bonds work? What are savings bonds? Seven steps to buy stocks and bonds

Moving up the risk spectrum brings us to stocks. A stock or equity is an investment, which represents a stake in the ownership of a corporation. Over the long run, stocks deliver higher returns than bonds or cash. Consequently, you’ll likely want some stocks in your portfolio. To invest in stocks directly, you’ll need to critically analyze each potential stock purchase.