Why Stock-Indexed CDs Could Protect Your Savings From Market Volatility

Stock-indexed or market-indexed certificates of deposit are similar to normal CDs, being an investment made for a set period of time. Where these differ is that instead of having a fixed interest rate, the return is linked to the performance of a stock market index, such as the S & P 500. If the market rises, you’ll make more money, but if the market falls - you’ll make less.

Similarities

As for normal CDs, you need to commit for the full time period and if you don’t, you’ll have to pay penalties. CDs are also taxable.

Differences

Stock-indexed CDs usually have a longer maturity than normal CDs, starting from two or three years rather than six months. Also, they tend to be sold through planners and stock brokers rather than banks. This means they can be harder to compare by yourself, and you may need professional help to figure out the best one for you.

Interest rates

Generally the well-known indexes are chosen, but in the past more unusual ones such as the Consumer Price Index have also been possible. Banks will use different methods to work out your returns, some averaging the yearly performance and others using a point-to-point method. Some will even have caps on the performance. So, it’s important to know what the rules are before you invest.

Peace of mind

Stock-indexed CDs are good if you want an investment that’s linked to the stock market, and potentially increase your returns but without too much risk. That’s because your original investment is protected. While there’s a risk you might not make much money, you wouldn’t lose any either.