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Investor Education The problem with five-year GICs, and the right way to sell Bombardier shares

I am thinking of setting up a five-year ladder of guaranteed investment certificates. Is this a good idea?

Normally, I would say a five-year GIC ladder is a great idea. It works like this: You spread your money across five different GICs, with maturities ranging from one to five years. When the one-year GIC matures a year from now, roll it into a new five-year GIC. A year later when the two-year GIC matures, buy another five-year GIC, and so on. By staggering your GICs, you prevent all of your money from maturing at the same time (when interest rates might be unattractive) and you always reinvest at the five-year rate, which is typically the highest.

For a GIC ladder to make sense, however, you have to be adequately compensated for locking up your money for a long period. That’s not the case right now. Because of the flattening yield curve, which reflects slowing global growth expectations, GIC investors don’t get much of an interest-rate premium, if any, on longer maturities.

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At Tangerine Bank, for instance, the yield on a one-year GIC is 2.15 per cent. The rate inches up to 2.25 per cent on a two-year GIC, 2.3 per cent on a three-year GIC and 2.35 per cent on a four-year GIC. These increases are barely visible to the naked eye. The rate on Tangerine’s five-year GIC? It’s 2.35 per cent – the same as a four-year GIC. You can find higher rates at other financial institutions, but they show a similar flat yield pattern.

GICs still have their place as a safe and secure place to park your cash. But given the meagre incremental returns when locking in for longer periods, you might consider setting up, say, a three-year ladder instead and giving yourself – and your money – more flexibility.

I hold 1,200 class A shares of Bombardier Inc. that I want to sell. The shares are thinly traded and I want to avoid selling bits and pieces and incurring additional commissions. I wanted to enter an “all or none” order but my broker said this is not an option. What do you suggest?

The Toronto Stock Exchange eliminated all or none orders (where a trade must be executed in its entirety or not at all) a decade ago, but you should still be able to sell your Bombardier shares with only one commission. Over the past three months, the class A shares (which carry 10 votes each, compared with one vote for the more widely held B shares) traded an average of more than 70,000 shares a day. That’s about 1 per cent of the class B volume, but it should still provide ample liquidity to exit your position. Another sign of a liquid stock is a narrow spread between the “bid” (the maximum price buyers are willing to pay) and the “ask” (the minimum price sellers will accept). BBD.A’s spread is often just a penny – the same spread as the largest, most liquid stocks on the TSX.

There are a couple of ways to execute the sale. The simplest is to enter a “market order," which will dispose of all of your shares at the best available price. With some low-volume stocks, it’s not unusual for a sale to be executed in stages – with a few hundred shares sold at one price, a few hundred more at perhaps a slightly different price, and so on. That’s because, as trades are executed, the bid and ask prices may change. But the process is very quick and, even if your broker sells your position in pieces, you will only be charged one commission.

Another option is to enter a “limit order” that specifies the minimum price you will accept. There is less certainty with a limit order, however. Depending on the price you set, you could sell all, some or none of your shares. What’s more, you could end up paying more than one commission if, for example, you sell half of your shares one day and the other half the next day. In most cases, however, if you sell all of your shares on the same day, only one commission will apply. Make sure you understand your broker’s policies before entering your order.

If I were in your shoes, I would probably choose a market order as it’s the easiest method and, given the stock’s adequate liquidity, you’ll probably get a price that’s close to the last trade. If you check the bid and ask prices before you enter the order, this should give you a pretty good idea of the price you’ll get. Some brokers also offer “level 2” quotes, which show you all of the buy and sell orders on the books. This will give you an even clearer picture of the price you’ll receive and will help you time your order so it’s most advantageous to you.

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E-mail your questions to jheinzl@globeandmail.com

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