CDs Vs. Stocks

You may have seen advertisements about CDs from your bank or on television. Just as you may take a loan from a bank to buy a house or a car, CDs represent a loan that you make to a financial institution. You purchase a CD for a specific term that may vary from a few months to more than a year. CDs with longer terms usually carry higher interest rates than CDs with shorter terms. After the term ends, the CD reaches maturity, and you receive your money back plus whatever interest the CD has earned during its term.

First, the good news: CDs issued by banks are covered by the Federal Deposit Insurance Corp. -- you can't lose the money you've invested. CDs also carry death benefits, much like insurance, which means your beneficiary can redeem your CD without paying a penalty if you die unexpectedly before the CD matures. The bad news is that bank-issued CDs typically yield low returns, while CDs offering dramatically higher interest rates may not be FDIC insured. If you need to withdraw money from your CD before it matures, you may have to forfeit some of your earnings, or pay a stiff early withdrawal penalty.

Stocks represent a share of ownership in a corporation. When you purchase stock, you become a shareholder and gain an ownership interest in the business. The more stock you hold, the greater ownership percentage you have in a given company. Corporations distribute profits to their shareholders in the form of dividends; as a shareholder, you receive a share of any earnings the company has produced during a specified period. Dividend payments occur at regular intervals, and you are eligible to receive dividend payments for as long as you own the stock.

Typically, stocks earn more than CDs or other guaranteed financial investments over the long run, which is the thinking behind the conventional wisdom for young investors to "buy and hold" stocks. However, a major catch with stocks is that you can lose every penny you've invested, with no recourse unless exceptional circumstances, like fraud, are involved. In addition, USA Today reported in 2011 that during the previous 30 years, bonds had actually outperformed stocks, with a much lower risk. One major reason is that stocks have suffered two major bear markets since 2000, with resulting decreases in dividends.