Time Deposits Reveal the Incentives for Sticking to Investments

by Investing School on February 3, 2012

Anyone who’s ever attempted to know how to get a how to get a high yield on a savings account knows that the price you pay for a large return is being unable to touch the deposit. While it’s apparent how an individual would see the benefits to this arrangement, the incentive for a bank to formulate such an agreement aren’t as obvious. Yet it takes no more than understanding the basis principles of banking to know why such institutions are willing to give you a higher interest rate on the basis that you don’t touch the money: it allows them to use the funds in your deposit for other purposes, and enables them to avoid having to plan for the possibility of that money being withdrawn. These perks are valuable to banks, and thus they will reward you with a higher interest rate.

It’s clear then, that there is a financial incentive attached to situations where money stays put for a significant length of time. In the world of investing, especially at a time when every stock option seems risky and everyone is telling you to diversify, this financial fact cannot be overlooked. There are big earnings potentials attached to the act of keeping your investments in one place for a long period of time, more so than in situations where it’s either been projected or flat-out expected that you’ll be pulling your capital out in a short amount of time. After all, it’s real money at the end of the day, and the companies and entities you invest in want to be able to use that capital to grow. When they know they can count on that being true, the growth process occurs at a much faster rate.

The bottom line reasons for sticking with an investment or choosing to sell it or dump it are very different from the reasoning behind whether or not to enter into a high yields savings situation. But the overall principle is the same. In exchange for forking over a large amount of capital today, you ensure that you are entitled to more money tomorrow, at least as long as the business itself survives that long. The only real difference is the risks involved; you’ll never lose your deposit and you’ll always net the interest in a bank, whereas investments are not so secure.

Hopping around from stock to stock won’t make a million dollars magically appear, because you’re completely neglecting the entire purpose of stock investments to begin with. The point of the stock market is to enable individuals to support a percentage of a company and in exchange have the potential of seeing the value of that percentage grow as the business grows with the money they invested. Just like a time deposit, the agreement to surrender today’s capital in exchange for the chance for more money in the future is a two-way street: you like this arrangement for the easy profit, while the institution likes it for the easy money.

Never let this cold hard fact about investing leave the forefront of your financial thinking.

This is a guest post from Jenna Smith, a resident and student in the heart of the Midwest, St. Louis. Upon graduation she hopes to travel the world writing about her travels. Someday Jenna hopes to be part of a worldwide publication or start her own platform for unique writers like herself.

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{ 1 comment… read it below or add one }

Carl February 5, 2012 at 2:49 am

Nice analogy! A stock is a share in a company, and if you really think about that, then you want to make sure you’re putting your money into a worthwhile company — because once you do, you’re one of the owners. You don’t want to be part owner of a crappy company. You want to be part owner of an excellent company that will reward you for your investment, for many, many years.


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