Stocks and CDs are both very common investments and can be used to help you grow your money and build your wealth. But they are two extremely different approaches and only one will help you build real wealth.
First of all, let’s look at what these investments actually are, starting with CDs. A CD is simply an investment that banks offer. Anyone can invest their money into a CD and earn a secured return on their money. This return is normally small, 1-4% annually, however it is safe and that is the trade off.
It is a very safe way to invest and helps you to keep up with inflation. But that does not mean that it is all good, there is one problem with this strategy.
Few people take it a step further and ask, “Why is this bank willing to pay me a guaranteed return simply for me letting them borrow my money? Don’t they run a business and want to make money themselves?” Of course they do, and they do make money because they are investors themselves.
Banks will take the money that is invested into them and then turn around and invest it themselves into things like loans and buying fundamentally strong dividend paying stocks. This way they can grow that money faster then the interest they have to pay.
Although these type of investments do not have a guaranteed return the potential return is so massive that paying out 1-4% interest on borrowed money is almost nothing.
A few investors have started to get smart about it and have decided to stop investing into things such as bank savings plans and other investments which are similar to them. Instead they start investing into things like the stock market that have a much higher reward potential.
Stocks represent ownership of a company. Over the long term they have been a very powerful way of investing your money offer a much higher return then other many other assets out there.
So, does that mean that you should stop investing into safer assets like CDs and go right to the meat an bones that come from riskier investments with a higher growth potential? Well that depends on what your goals are and how much of an investor you want to be. If you want to study the market and invest for years then stocks can be very powerful.
On the other hand if you just want to have a safety net and have that safety net keep up with inflation, then of course you don’t want to invest it into something that can potentially lose you money. They are really two different types of investments which work better in two different ways.
For some stock market tips and more information on the stock market visit Shaun’s site about the stock market basics
