It's normal to think of your bank accounts and your investments as two separate things. But when it comes to certificates of deposit (CDs), the money you deposit with the bank is indeed an investment.

That might seem counterintuitive since CDs don't involve the risks associated with buying stocks or bonds, and they don't usually give you high yields, but just like investing in the stock market, investing in CDs is one way you can make your money work for you.

Is a CD an investment?

CDs are different from most types of investments, but they're investment accounts nonetheless. Like stock returns, the interest rates on CDs are impacted by market conditions, so the amount you can earn depends on your timing and how much you invest.

Unlike stocks, CD investments are part of the "fixed income" asset class. Assets in this class are typically low-risk and offer low but predictable returns. With fixed-income investments such as CDs and bonds, your risk increases the longer you invest since the earnings usually fall farther out of pace with inflation over time.

How do CDs differ from other investments?

CDs are a type of investment, but they work differently from most other investment types. Here's what makes them unique:

Guaranteed returns

With most CDs, you know exactly how much interest you'll earn up-front. That's because CDs usually have fixed annual percentage yields (APYs) that are locked in from the date you fund the account. So if you deposit $1,000 into a one-year CD with 3% APY, you're guaranteed to earn $30 in a year.

When you invest in the stock market or real estate, there's no guarantee you'll make money. In fact, you can lose money if the market takes a downturn or if a company you invest in goes out of business.

Read more: Can you lose money in a CD?

Early withdrawal penalty

Most banks charge an early withdrawal penalty if you withdraw money from a CD before the end of the agreed term, also known as the maturity date. These penalties can be complicated to calculate — they're usually equivalent to several months’ worth of the interest you've earned — but the penalty rate is always established up-front.

With investments like stocks or cryptocurrency, there's no such thing as an early withdrawal fee. However, you might be charged a fee each time you sell or trade, and the tax rate on the profits can be higher if you sell within a year of owning the security. You also risk taking a loss if the value of your investment has decreased since you made your purchase.

Read more: How to avoid taxes on CD interest

Low risk

CDs usually have FDIC or NCUA insurance, which protects you from losing up to $250,000 if the issuing bank or credit union goes out of business. So unlike the stock market, you don't risk losing your principal (the money you personally invest). On the other hand, you do risk losing out on the higher returns you could earn by investing in other assets like stocks or mutual funds.

Low returns

One of the main goals of investing is to earn returns that are higher than the inflation rate. But like most low-risk investments, CD investments have low returns. In other words, inflation may outpace your earnings. Plus, you won’t be able to generate enough compound interest to meet major long-term savings goals, such as funding your retirement.

Historically, cash investments like CDs have only earned an average of 0.4% annually, while bonds have earned 5% and stocks more than 10%. Even in 2024, when some CD rates are at near-historical highs of 5% and up, you can earn more money by investing in other types of assets.

Read more: The best CD rates on the market for 2024

Maturity dates

CDs are time-based investments that last for several months to years. When you invest in a CD, you choose the term length Once the term ends, your deposit stops earning interest unless the financial institution automatically rolls the funds into a new CD. With most other investments, there's no time limit on how long you can earn money on your principal.

Should a CD be part of your investment portfolio?

CDs should only make up a small portion of a well-diversified portfolio, but you might consider increasing that portion when interest rates on CDs are high.

Why invest in such a low-yield asset? Because CDs serve a specific purpose that other investments don't: They protect your principal and give it back to you at a set time without penalties. That makes them a good place to keep money when you know when you'll need it back in the next few months or years (for instance, if you're planning to make a down payment on a home in six months).

For money you can part with for a longer period of time, like your retirement savings, you'll want to invest elsewhere to get higher returns. Depending on your goals, the best investments for long-term goals can include a mix of stocks, bonds, and real estate. You may want to consult a financial adviser to discuss what type of investment strategy will help you reach your goals.

Read more: Why a CD should be part of your retirement savings plan