When you have a good sum of money in hand, you have to carefully analyze all your investment options. Most often people prefer to invest in savings accounts or stocks as they have traditionally been popular.
Both savings accounts and stocks are attached with pros and cons. Additionally, you need to consider how strong you are when it comes to taking risks for high returns (in stocks), or if you prefer to enjoy little profit over a long period of time (savings account).
The working of savings accounts is very simple. You deposit the money into your savings account and enjoy interest (annually/monthly). The more you save, the more interest you get. The bank may charge you a certain fee for account opening, cheque book and ATM cards.
For stocks, you need to be active. At first, you have to determine the exact amount of money you are willing to spend (invest), knowing that it is risky as you can lose all. You can choose between companies listed on the stock exchange market and play with the ups and downs. So, at the end of the day you can either win big or lose all!
In savings account your return is determined by the interest rate offered by the bank, or the market condition in your country. For example, your bank offers 2 percent interest rate. So, if you deposit 100 pounds—you earn 2 pounds every year.
On the other hand— stocks generate returns based on how poor or well the company performs on the stock exchange market. In case it performs well, your returns will be incredibly high, while in case of bad performance you have to bid farewell to some or all of your original investment.
As a matter of fact, savings accounts are deemed to be one of the safest places to deposit your money as the government insures a certain amount in case the bank goes out of business. However, safety is not offered in stocks. If your company loses out the battle, you are a victim too.
Both stocks and savings account are taxed, but in different ways. In savings account, taxes are based on interest earned annually. The tax rate is determined at the ordinary income tax rate.
On the other hand, in stocks, taxes are not pain on any gains earned (only if you continue to play with it). When you decide to sell off the stocks, you have to pay a certain amount of taxes on the gains earned. Additionally, for stocks owned for one year or less—ordinary tax rates are charged, while stocks owned for more than a year, long-term rate are applied.
So, when choosing your investments make sure to evaluate the aforementioned factors in determining which form of investment is best suitable for you. Since saving accounts are safer when compared to stocks, they are deemed to be the first choice of investment.