You might occasionally hear the word “savings” in reference to investments, but there are important differences between the two. For instance, certificates of deposit (CDs) are a type of savings account, while stocks are an investment. CDs provide a sense of stability to your portfolio while stocks might provide a better return. Choosing the right investment can be tough but working with a financial advisor can give you the right insights to choose the best investment options for your overall plan.
What Is a CD?
A certificate of deposit (CD) is a type of deposit account available at any bank or credit union. CDs allow the account holder to invest their money for a set period, such as six months or five years. At the end of the CD’s term, you can choose to renew it or withdraw the money. If you withdraw money before the CD matures, the bank will impose a penalty.
CDs pay periodic interest, such as on a monthly or quarterly basis. The longer the CD’s term, the higher the annual percentage yield (APY) will usually be. Interest on these accounts will compound, so they help your money grow over time.
CDs are an effective way to save money, especially if you want to limit your ability to withdraw money and spend it. However, this also means they aren’t the best place for an account that should be liquid, such as an emergency fund.
- FDIC-insured up to $250,000
- Higher APY than traditional savings accounts
- Available at any bank or credit union
- Less liquidity than other types of savings accounts
- Interest payments may be lower than returns on stock market investments
- Interest may not be enough to beat inflation
What Are Stocks?
A stock, also known as equity, is a security that represents a piece of ownership in a company or corporation. Private companies may issue stock to employees or to large investors. Alternatively, they can list the stock on an open exchange, such as the NYSE or Nasdaq. If a company’s stock is listed on an open exchange, this is known as being publicly traded.
Stocks are divided into shares, which investors can buy on exchanges. Stocks are generally considered a riskier investment than banking products, such as CDs. However, share prices can fluctuate over time. This has historically provided higher returns for shareholders than the returns on savings accounts.
For example, the S&P 500, a major stock index, has returned an average of about 10% per year over the past 100 years. The S&P 500 captures about 500 of the largest companies in the U.S., and investors can easily invest in them with an S&P 500 index fund. Some years have returned much less, and some have returned more. Still, the risk is worth it for many investors because long-term returns tend to be higher than savings accounts can provide.
Depending on the type of investment account, stocks may be more liquid than CDs. For example, that is true if your stocks are in a brokerage account, while a 401(k) is not as liquid.
- Returns can be higher than savings account interest rates
- It May help investors fight inflation
- Stock may come with certain privileges, such as voting rights
- SIPC-insured up to $500,000
- Volatility can be high
- SIPC insurance doesn’t protect against a drop in share prices. It only protects clients of bankrupt broker-dealers.
Comparison of CDs and Stocks
CDs and stocks each have their pros and cons. In general, CDs are a safe place to keep your money, but you won’t be able to access them for several months, or perhaps a few years. While they don’t have the highest APYs, they tend to be higher than those offered by traditional savings accounts, and you know your money will be safe.
Stocks tend to be riskier, but they have a chance to grow more than CDs can in the long term. However, you can also lose money, especially in the short term, and returns are not guaranteed.
Comparing CDs and Stocks
|Returns||Higher APY than traditional savings accounts, but can be lower than returns on stocks||Can be higher than returns on savings accounts|
|Risk||Low Risk||Higher Risk|
|Liquidity||Low Liquidity||Higher liquidity (for brokerage accounts)|
|Insurance||FDIC-insured up to $250,000||SIPC-insured up to $500,000 (only for clients of bankrupt broker-dealers)|
Stocks and CDs are two of the most popular ways to save and invest. CDs are a safe haven that allows you to earn modest interest over time, while stocks have more risk for the chance to earn higher returns. While both stocks and CDs have their advantages, the right choice will depend on your situation and what you hope to gain from your investment.
Tips for Investing
- A financial advisor can guide you through major financial decisions, like determining your investing strategy. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Deciding how to invest can be a challenge, especially when you don’t know how much your money will grow over time. SmartAsset’s investment calculator can help you estimate how much your money will grow to help you decide which type of investment is right for you.
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