CDs have traditionally been criticized for returning too little and being so incredibly safe that only the most conservative of investors bought CDs. However, CDs have been gaining popularity during this economic downturn. This simple primer compares CDs to other types of investments, giving you a brief overview so you can make wise investing decisions.
CDs (certificates of deposit) are investments made with a financial institution that deliver a set rate after a set amount of time. They are insured by the FDIC and do not allow you to withdraw your money before the passage of the agreed upon amount of time (at least not without significant penalties). They are very safe investments but keep in mind that cd rates vary.
CDs Compared to Stocks
Stocks, on the other hand, are very high-risk investments. Stock values rise and fall daily. A stock you bought last Monday might increase or decrease in value by 100% by the end of the week. However, you can sell your stocks at any time, giving you access to your money at any time. The difference? Stocks are high risk, but allow you access to your cash at any time. CDs are practically risk-free, but tie up your money for short periods of time. Stocks have the potential for incredible financial gains, CDs provide only modest gains.
CDs Compared to Mutual Funds
Mutual funds represent a variety of stocks and bonds, bundled together by a financial representative who manages the investments in the fund. Mutual funds have the potential to deliver higher returns while modifying the risks associated with stock market investments. Mutual funds require you to pay management fees, but they allow you access to your money at all times. They are riskier than CDs, but they will usually deliver higher returns and allow you access to your money throughout.
CDs Compared to Bonds
CDs and bonds usually deliver similar rates of returns, but bonds often are longer-term than CDs. Neither CDs nor bonds offer access to your money; once invested, you have to wait until the set time passes. However, bonds can be tax-free. There are many types of bonds; youâ€™ll have to investigate the specific type to determine if the benefits outweigh those of a CD requiring the same length of time.
CDs Compared to Money Market Accounts
Money market accounts deliver low returns, but they allow you to withdraw from your investment or make deposits to increase your amount in the account, as you like. They typically pay a lower return than CDs, but the flexibility may be worth it to you. â€¨â€¨When deciding between CDs and other types of investments, youâ€™ll have to weigh the following factors: risk, desired returns, and accessibility to money.