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.
Are CDs better than the stock market right now? ›
In the long term
A 10-year Discover® Certificate of Deposit has a decent 3.75% APY, for example, but that pales in comparison to the average stock market return for the last 10 years, which has been about 12.39% as measured by the S&P 500 Index (or 9.48% when adjusted for inflation).
Is a 5 year CD a good investment? ›
A five-year certificate of deposit can be a great way to earn a guaranteed return on money you won't need in the near future.
Are money 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.
What is the best investment right now? ›
Americans' views of the best long-term investment when choosing between bonds, real estate, savings accounts or CDs, stocks or mutual funds, or gold. Real estate is number one, at 36%. Note: 2022-2023 figures based on half-sample results that included cryptocurrency option.
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.
How much will a $500 CD make in 5 years? ›
This CD will earn $120.39 on $500 over five years, which means your deposit will grow by 24.6%.
How long should you keep money in a CD? ›
Traditionally, in your typical ladder, five-year CDs have a higher yield than one-year CDs. But these days, you're likely to see a CD with a term of around six months to 18 months will likely have the highest yield in your ladder.
What bank is paying 5% on CDs? ›
Highest current CD rates (overall)
| Institution name | APY | Term length |
|---|
| TAB Bank | 5.00% | 18 months |
| Newtek Bank | 5.00% | 18 months |
| My eBanc | 5.00% | 18 months |
| Morgan Stanley | 5.00% | 2 years |
31 more rowsStandard 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.
Why am I losing money on my CD? ›
Many CDs have early withdrawal penalties equal to several months of interest. You could lose money in a CD if you withdraw before you've earned enough interest to cover the penalty.
Where is the safest place to put your money during a recession? ›
Saving Accounts
Like checking accounts, they're federally insured and are generally the simplest and safest place to keep cash in good times and bad. Other advantages of savings accounts include: Simple to open and maintain. Deposits are fully insured.
Are CDs safe if bank collapses? ›
The FDIC Covers CDs in the Event of Bank Failure
But the recent regional banking turmoil may have you concerned about your investment in case of a bank failure. CDs are treated by the FDIC like other bank accounts and will be insured up to $250,000 if the bank is a member of the agency.
Where can I get 7% interest on my money? ›
As of May 2024, no banks are offering 7% interest rates on savings accounts. Two credit unions have high-interest checking accounts: Landmark Credit Union Premium Checking with 7.50% APY and OnPath Credit Union High Yield Checking with 7.00% APY.
Should I put $100,000 in CD? ›
The more money you've saved, the more options you generally have for earning a higher interest rate. Those with $100,000 or more may want to consider depositing their money into a jumbo CD that's insured through a bank insured by the Federal Deposit Insurance Corp.
Is it a good time to buy CDs right now? ›
If you're in a position to save in today's higher interest rate environment, investments like CDs could help accelerate your savings. CD rates have skyrocketed since 2022: 1-year CD rates have increased more than twelve-fold, with 3-year and 5-year CDs up nearly six-fold and five-fold, respectively.
Do CDs ever beat inflation? ›
By some measures, CDs may be able to keep up with inflation. However, your actual purchasing power is based on your income after taxes. The interest earned from CDs held outside of a qualified retirement plan is taxable as ordinary income, so the net return of CDs is reduced by your effective tax rate.
Why is CD better than money market? ›
CDs typically offer higher interest rates compared to regular savings or money market accounts. Generally, the longer a CD's term, the more interest it pays, helping offset the loss of liquidity.
