The Average Certificate of Deposit Vs. the S&P

Certificates of deposit, sometimes also referred to as time deposits, are special types of bank accounts. With a CD account, you agree to leave your money in the bank for a set period of time. In exchange for your promise not to withdraw your money, the bank pays you a higher interest rate than it offers for a savings account or an interesting-earning checking account.

The S&P 500 is a stock index that tracks the performance of the stocks of 500 U.S.-based companies. To qualify for inclusion on the S&P 500, a company must be traded on the New York Stock Exchange or the Nasdaq and have a market capitalization of at least $4 billion. S&P adjusts the index periodically in an attempt to ensure it remains an accurate representation of the market as a whole.

While the S&P 500 is an index used for market tracking purposes, you can also buy shares of a fund that invests in stocks on the index. These funds are designed to hold similar stocks in proportions similar to those in the index.

An investment in a S&P 500 stock usually has a much higher return than an investment in a CD. For example, the unweighted average annual return of the S&P 500 over the 40-year period of 1973 through 2012 is 11.43 percent. A six-month CD returns an average of 6.16 percent. Looking over shorter time horizons, the S&P achieved 8.82 percent to a CD's 2.24 percent between 2003 and 2012. In a time of low interest rates, like the period from 2010 to 2012, the S&P 500 does significantly better. During that period index-listed funds earned 10.94 percent, as opposed to 0.43 percent for CDs.

If you invested $1,000 in a S&P 500 index fund on Jan. 1, 2008, you would have finished the year with less than $628. The same $1,000 in a six-month CD would have turned into slightly over $1,031. CDs usually are very safe, since deposits in most banks are insured up to $250,000 by the Federal Deposit Insurance Corporation. When you invest in the S&P, on the other hand, the value of your money will fluctuate with the value of the S&P, and you could end up losing some of it.

Stock investments, like shares in funds that track the S&P 500, can be sold relatively quickly for whatever price the market will bear, although you may have to pay a commission. CDs, on the other hand, usually carry heavy penalties for early withdrawal. While you can usually get your money very quickly, it could cost you a significant portion of your return.