The Difference Between Investment Products & Bank Accounts
Bank accounts and investment products are similar in the sense that they can be used to earn money by accrual of interest or by profit. Their main difference, however, lies in the risk involved. Banks can readily guarantee how much a person will earn from a particular type of account. There is no such guarantee, however, with investment products.
Bank Accounts
How much a person earns from bank accounts depends on the type of account he or she is using. The most commonly used type of account is a savings account. It is also easier to apply for, as you would only have to put up a small amount of money for its starting and maintaining balance. It has a fixed interest rate, which you can earn if you leave money long enough in your account.
A current or checking account allows you to issue checks as payment. If the amount stated in your check is more that what is in your account, your bank may still honor it, but you will have to supply the remaining balance and pay resulting fines within a given period of time. You can also earn money from checking accounts, but the rate is typically lower compared to what you can get with a savings account.
Time deposit accounts are like savings accounts, but with one significant difference: they do not allow you to withdraw anytime you want. Usually, you will have to leave your money untouched for a stated number of months or years. Payout, however, is quite higher than what you can earn from a savings account.
Investment Products
The types that most people invest in are stocks, mutual funds, bonds and life insurance. Stocks are shares in a company that you can purchase from the stock market. You earn income when the value of the stock increases, allowing you to sell your stocks at a higher rate than what you originally purchased them for. Keep in mind, however, that it can be the other way around and you would end up selling your shares at a loss. Bonds are basically IOUs issued by a government or company, and which promise to pay back the buyer with guaranteed interest income.
Mutual funds are a more complex investment product compared to the other two. They represent funds from investors like you and are professionally managed to earn the highest rate of interest or profit. If you choose this type of investment, you have to make sure that you and your fund manager share the same investment goals.
Lastly, there are annuities or life insurance. They pay out when the insured party dies or lives up to a certain age. How much you earn depends on how much you are willing to pay for your monthly premiums.