Certificates of deposit (CDs) and stocks are two popular and very different types of investments. CDs are banking products you buy for a set time period, such as five years, and earn a fixed rate on your money. Stocks are shares of companies, so their value depends on the performance of the underlying company.
If you're deciding between CDs or stocks, here are the returns you can expect from each one and how to figure out the right investment for you.
CD vs. stock performance
Thanks to recent interest rate hikes, CDs are currently offering their highest payouts in years. The best CD rates are currently over 5.5%. Rates vary depending on how long of a CD you want, but you can get at least 5% for CDs ranging from one month to as long as five years.
That's good, but the stock market tops it by a wide margin. The S&P 500, an index of 500 of the largest companies, has an average return of about 10% per year.
But there are no guarantees with the stock market. With CDs, you know how much interest you'll earn and for how long. The stock market is unpredictable. It has been doing well lately. The S&P 500 increased by 24.2% last year, and has continued growing this year. That's not always the case, though. In 2022, it declined by 19.4%.
Invest in CDs if you need stability
Because CDs offer a fixed return, they're the better choice if you'll need the money in the near future. For goals you have within the next five years, go with CDs over stocks. To give you a few examples, CDs can work well for money you plan to use for:
- A down payment on a home
- Your wedding or honeymoon
- Upcoming college costs
- Buying a car
These are all situations where it's risky to put your money in the stock market. Stocks may offer a greater potential return, but unlike CDs, they can also lose value. The last thing you want is for your wedding or home fund to be worth less than because of a sudden market downturn.
You could also use other banking products to save for short-term goals. High-yield savings accounts are a popular choice. The advantage with CDs is that they let you lock in an interest rate. And it's possible that interest rates will go down later this year, so now is considered a good time to get a CD.
Invest in stocks for long-term financial goals
Stocks are a better investment when you don't need the money any time soon and can afford to ride out the ups and downs of the market. For goals that are more than five years away, invest in stocks over CDs.
Retirement savings is the most common example, but the same is true for any other goal that's still a ways off. For example, if you're in your early 20s and would like to buy a home in your mid-30s, you could put that money in the stock market. You still have plenty of time to let your money grow and get through any downturns.
As you get closer to your goal, you can adjust your strategy. Continuing the example above, once you're within five years of buying a home, you'll probably want to sell some of your stocks and put that money in a savings account or CD for your down payment.
You may want both for a balanced portfolio
Investing in CDs or stocks doesn't need to be an all-or-nothing decision. Many investors put money in both: CDs for their short-term goals and stocks for their retirement nest egg.
It's wise to have some money in the bank and some in the stock market. Stocks are one of the best ways to build long-term wealth, but they're too volatile to have all your money in them. That's where high-yield banking products can be useful, so you have cash when you need it. Some people stick to savings accounts for that, but CDs generally pay a bit more and allow you to lock in your interest rate.
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FAQs
Because CDs offer fixed interest rates, they're better for short-term financial goals where you don't want any risk of losing money. Stocks are better for financial goals that are more than five years away, such as retirement.
Should I move money from stock market to CD? ›
When deciding between a long-term CD or putting money in the stock market, always take into account your goals and how long you'll need to achieve them. For long-term plans like retirement, the market offers better returns than locking up your cash in a CD.
Are CDs safe if the market crashes? ›
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
Are CDs a good investment during a recession? ›
CDs are primarily a safe investment. They are guaranteed by the bank to return the principal and interest earned at maturity. CDs can provide modest income during turbulent economic times like recessions when other types of investments often lose value.
Why should you put $20,000 into a long term CD now? ›
A $20,000 initial deposit in a CD could yield between $260 and $4,700, with longer terms paying out significantly more. Short-term CDs have higher APYs, but long terms could guarantee high interest rates for a longer period.
Should I invest in CDs or stocks right now? ›
Because CDs offer a fixed return, they're the better choice if you'll need the money in the near future. For goals you have within the next five years, go with CDs over stocks. To give you a few examples, CDs can work well for money you plan to use for: A down payment on a home.
What is the best investment right now? ›
11 best investments right now
- High-yield savings accounts.
- Certificates of deposit (CDs)
- Bonds.
- Money market funds.
- Mutual funds.
- Index Funds.
- Exchange-traded funds.
- Stocks.
CD rates may not be high enough to keep pace with inflation when consumer prices rise. Investing money in the stock market could generate much higher returns than CDs. CDs offer less liquidity than savings accounts, money market accounts, or checking accounts.
Can I lose money in a CD account? ›
Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000, so they cannot lose money. However, some CDs that are not FDIC-insured may carry greater risk, and there may be risks that come from rising inflation or interest rates.
Are CDs safe if government defaults? ›
While no one knows precisely what a default would entail, consumers can rest assured that their Treasuries and certificates of deposit are reasonably safe.
As for whether financial planners tend to recommend CDs for their wealthy clients? It depends. Certified financial planner Blaine Thiederman says CDs are low-risk but they also offer low returns. “If you're a high-net-worth individual, you've likely got a diversified portfolio already.
Should I lock in a CD now or wait? ›
Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.
What is a good amount to put into a CD? ›
While that amount will be different for everyone, you should keep a few things in mind. First, a minimum amount is usually required. Most CDs have a minimum deposit between $500 and $2,500, though some can be lower or higher than this range.
Should I put money in a 401k or CD? ›
If you're a long way out from retirement, a CD probably isn't your best savings option. Retirement accounts like 401(k)s and IRAs offer tax advantages and potentially higher returns in the long run.
What is the biggest negative of putting your money in a CD? ›
Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.
Should I move my money out of the stock market? ›
Unlike the rapidly dwindling balance in your brokerage account, cash will still be in your pocket or in your bank account in the morning. However, while moving to cash might feel good mentally and help you avoid short-term stock market volatility, it is unlikely to be a wise move over the long term.
What is a disadvantage to putting your money into a CD? ›
Penalties: One of the main drawbacks of CDs is that in most cases you're locked into the maturity term. If you take money from the CD before it matures, you will get hit with a penalty fee equal to at least seven days of the interest earned or even more.
Should I move money to a CD? ›
The bottom line. A short-term CD is an effective savings vehicle that can likely fit well within your financial plan. However, it's probably not the best idea to move all of your money to any savings or deposit account, CD or otherwise.
