Investing vs. saving is an ongoing debate. Generally, people have clear choices of whether they prefer to invest or save. These choices depend on the level of risk, return, and convenience of each option. However, the choice becomes difficult when the client compares the stock market to high-interest rate accounts. The lack of meaningful information sources further complicates the dilemma. Thus, the client may feel overwhelmed when making this decision. Consequently, this article compares and contrasts the high-interest rate account to the stock market. Here, the pros and cons of each are discussed in the following order:
Difference between high-interest rate account and stock market
The client must know the basic differences between the high-interest rate account and the stock market before considering their pros and cons. The high-interest rate account works on the principle of no-risk. Thus until the commercial bank offering the high-interest rate account is operational, your money is safe. Similarly, you earn interest on the savings in this account. As such, your savings are unaffected in any scenario. For example, if the bank suffers a loss, it does not affect your savings.
On the other hand, you earn dividends by investing in the stock market. Essentially, you purchase the stock or proof of part ownership in a publicly traded company. This share may or may not earn dividends depending on the financial performance of the company. Additionally, the company’s loss is your loss. The principle here is profit sharing, not interest payments. You are becoming an owner of the company, not lending to the company by investing in the stocks.
The Pros and Cons of High-Interest Rate Accounts
A major benefit of High-Interest Rate Accounts is that they guarantee assured returns. Thus, even if the bank sustains a loss, you will still receive the interest promised. Additionally, the bank and your account are separate. Thus, any losses of the bank do not reflect on the account’s balance. Furthermore, the person saving the money cannot lose their initial sum due to the bank’s operational losses.
Another major benefit of a high-interest rate account is the higher return it provides compared to standard accounts. Additionally, the client can easily open a high-interest rate account with online banks.
However, the high-interest rate account has many drawbacks. They offer limited deposit and withdrawal options. Consequently, the convenience of these accounts is lower than stock market investments. Additionally, the client has to pay bank service charges. Similarly, the interest rate may not be as high as the dividend rate offered by top companies. Moreover, the FDIC covers only a certain amount of total loss if the bank fails.
Pros and Cons of the stock market
The stock market offers greater opportunities for expansion of investments. Generally, the dividends earned from investments in successful companies are high. They often outweigh the interest earnings from high-interest rate accounts. Additionally, the stockholder can sell the stock at any time. This aspect gives greater control over investment. Also, it creates a chance to earn capital income. The stock market also offers chances of higher than usual dividends if the company makes supernormal profits.
However, the stock market operates on the notion of risk. Thus, the investor can lose the entire amount they have invested if the stock market crashes. Similarly, the company does not guarantee the payment of dividends. The Board of Directors may reduce the rate or completely cancel dividends if the company makes lower profits. Additionally, no deferred payments apply to stock dividends as well (except preference shares). You may not be able to sell your stock if there is a low demand for the company’s stock.
Compare and Contrast Chart
| High Interest Rate Account | Stock Market |
| Safe investment – Account holder cannot lose investment if banks make loss | Risk involved – entire investment lost if company or stock market collapses |
| Federal Insurance | No Insurance |
| Interest Are Always Paid | Dividends May or May Not Be Paid |
| Rates Are Still Lower | Dividends Can Have Exceptional Rate |
| No Say In Bank’s Administration | You Can Attend The AGM and Vote For Board of Directors |
| Initial Investment Only Increases By Interest | Initial Investment Increases By Premium and Capital Gain – Good Will Also Applies |
| Can Not Sell Saved Funds | Stocks Can Be Sold Freely |
