While stock tips and investment advice are all the rage, there are other options that can be explored by investors. Some of these options are available at your bank. From savings accounts to certificates of deposit, banks offer a variety of ways to earn returns on your money. But these financial investments come with a set of advantages and disadvantages of which budding investors should be aware.
Different Bank Account Types
When "investing" your money in a bank, there are a few options. You can put your money in a checking account or a savings account, where it will accrue a small amount of interest. Or you can invest in a bank's money market account, which functions somewhat like a savings account but with higher returns and more restrictions. Lastly, you can invest in a certificate of deposit (CD), which features some of the higher interest return rates but contains some serious restrictions on what you can do with your money.
With all of the investment or financial tools available at a bank comes one serious advantage: security. When you invest in an American bank, your money is safe even if you invest it in a CD or money market account. Should the bank fail or some other disaster strike, your money is guaranteed by the FDIC, a federal insurer that guarantees deposits up to $250,000 should something happen to an FDIC-insured bank. Most, if not all, banks in this country are insured in this way. In comparison to the stock market, bank investments are safe investments; you won't lose money from market swings or economic trends.
The ironclad security of bank investments, whether in accounts or CDs, is balanced out by the painfully low returns on these financial services. Checking accounts earn no interest; savings accounts earn a very small amount, usually amounting to 1 or 2 percent. Even with a large amount of money invested, you'll be earning pennies with these types of investments. Money market accounts and CDs earn more. Typical rates for a CD are 5 percent, according to BYG Publishing.
Depending on the type of bank investment you make, liquidity can be either an advantage or a disadvantage. It is an advantage if you possess a savings account. While you may earn small returns, you typically have access to money in a savings account at any time. For CDs and money market accounts, there are limits on when you can access your money. In opposition to this, stock market investments are, in theory, very liquid: You can sell your stock at any time. But, the practicalities of the market dictate that to recoup money lost or to realize higher returns, you may be forced to leave your money in stocks until the price reaches a point where you can make money or make back money lost.