With most people still feeling the repercussions from the Great Recession that peaked a few years ago, placing your money in anywhere other than a government-insured savings account may seem like the last thing you should do. Businesses are slowing, clawing their ways out of the financial troubles they and most consumers faced during that period, and the economy is again growing – albeit slowly. With world markets becoming more and more stable as time goes on, diversifying your investment portfolio should be one of your top priorities to make sure you are making the most of your existing capital. Should you place your money in a bank’s savings account or invest it in the stock market?
Consumers’ deposits in federally recognized banks are insured up to $250,000 in the case that the bank defaults or becomes unable to pay the sum in any other covered way. This insurance is fundamental to the world’s faith in the U.S. banking system and the billions of dollars that consumers entrust in American banks annually. As such, placing your savings in a bank’s savings account is practically without any real risk of being lost or stolen (as has occurred in other countries with weaker governments and financial systems).
Investing in stocks is a little different. There is no such thing as a risk-free stock. Investing in stocks is like buying a little portion of a company, and by owning a stock you are betting on the company’s future growth and prosperity which in turn becomes your economic profit on the stock. If you bet incorrectly and invest in the wrong stock, you might not make any profit and could even lose the initial cost spent during its purchase. Not all stocks carry the same amount of risk, however. For example, buying stocks in a company like Apple with an extremely successful and stable track record and a similar projected future would be considered a relatively safe stock to invest in that would probably yield low to moderate profits. Investing in a newer company with an innovative idea would necessarily carry more risk but, if successful, would provide you with a markedly higher profit.
Interest rates on bank savings accounts vary over time and from bank to bank. Unfortunately, we are currently seeing some of the lowest savings interest rates in U.S. history, averaging at an astonishingly low 0.13%. Although a bit of shopping around might yield you an interest rate of 1%, finding anything higher might just be too good to be true. Beyond adding almost no profit to your savings, keeping your money in a savings account most likely is causing you to technically lose money. The current inflation rate of the U.S. economy is 1.2%. If you are earning less than that on your savings account, you are actually losing money every year as the real value of your cash can buy you less and less. Until interest rates on savings accounts increase, it is not economically efficient to save your money in this way.
The profit earned on stocks is associated with the value of the stock itself, a variable value that changes as the company itself becomes more or less successful. The success of a company is dependent on several industry-specific factors, wherein the risk element of investing in stocks is apparent. The potential profit you can earn on stocks, however, is technically limitless. You could invest a penny to buy one stock in a startup company that then takes off and permits you to sell that same stock for $1,000 a year later. However, the reverse is also true; you could invest $1,000 in a stock and be forced to sell it later at one penny a stock. Playing the stock market is only for those that can stomach at least a bit of higher risk than that associated with bank savings accounts.
If you are trying to decide whether to invest your money in a savings account or stocks, think about what levels of risk you are comfortable with along with your realistic interest and profit goals for your invested sum. Don’t be afraid to try something new!