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What are the merits of investing $10,000 in a CD as opposed to stocks?

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soman2006 | Student, Undergraduate | Salutatorian

Posted May 29, 2012 at 9:33 PM via web

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What are the merits of investing $10,000 in a CD as opposed to stocks?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted May 29, 2012 at 9:49 PM (Answer #1)

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The relative merits of these two options have to do with the amount of risk you are willing to take and the amount of reward you are hoping for.

A CD is a very low-risk investment.  CDs are bought through banks and typically have a guaranteed interest rate attached to them.  They are also insured by the FDIC.  These facts mean that you will get a guaranteed return and you cannot lose your money.

The downside to the CD is that you cannot get a large return the way you can on stocks.  With a CD, you are going to get a certain interest rate, but there is no chance of a larger gain.  With stocks, it is possible that the stocks you buy will increase a great deal in value and you will make much more than you would if you bought a CD.  However, you have to balance that against the risk that your stocks would go down and you would lose some or all of the money you invested.

So, CDs are low-risk, low-reward investments while stocks offer higher potential rewards but have serious risks.

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