CDs vs. Stocks: What's the Better Investment Right Now?

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.