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Stocks or Deposit: Where Should Investors Put Their Money in 2025?

2024 is marked by volatility in global markets, rising interest rates, and changes in tax regulations in several countries. In such conditions, it is crucial for private investors to select the most suitable financial instrument for investing their money: stocks or deposits.
Stocks are appealing due to their high returns and long-term growth potential, but they carry risks. Deposits, on the other hand, offer stability and capital protection, though their returns often fall short of inflation rates. This article examines the pros and cons of both options, considering tax systems and real-life examples.

Stocks as an Investment Instrument

Stocks are equity securities that provide their owner with a share of a company’s profit and the opportunity to benefit from increases in market value. This type of investment is considered among the most profitable but requires understanding the risks and careful analysis.

What Are Stocks?

Stocks are issued by companies to raise capital. By purchasing a stock, an investor becomes a co-owner of the company, gaining the right to:
  • Participate in profit distribution (dividends).
  • Gain from stock price increases associated with market value growth.
Stocks can be categorized into two types: common and preferred:
  • Common stocks provide voting rights at shareholder meetings but do not guarantee dividends.
  • Preferred stocks lack voting rights but offer fixed dividends.

Advantages of Investing in Stocks

Stocks have several significant benefits that make them attractive for long-term investments:
Potentially High Returns:
  • Stocks offer higher returns compared to deposits or bonds. For instance, over the past 10 years, the S&P 500 index grew by 170%, equivalent to an average annual return of about 10%.
  • Technology companies like Apple, Microsoft, and Amazon have demonstrated record-breaking growth in recent years, making their stocks top performers in terms of returns.
Dividend Income:
  • Dividends are a portion of a company’s profit distributed to shareholders. Dividend aristocrats, such as Johnson & Johnson and Coca-Cola, have been paying dividends for over 25 consecutive years while increasing them annually.
  • The average dividend yield of Dow Jones companies is about 3% per year, providing stable passive income.
Long-term Capital Growth:
  • Stocks have significant capital growth potential. For example, if you had invested $10,000 in Apple stock in 2000, by 2024, the investment would have grown to over $500,000.
Liquidity:
  • Stocks of large companies can be bought or sold at any time during trading hours, making them appealing for those needing flexibility.
Inflation Protection:
  • Over the long term, stock returns typically exceed inflation rates, preserving the purchasing power of capital.

Risks of Investing in Stocks

Despite their many advantages, stocks come with risks that need to be considered when building a portfolio:
Volatility:
  • Stock prices can fluctuate significantly. For example, during the COVID-19 pandemic, the S&P 500 dropped by over 30% in March 2020 within one month but later recovered.
  • Volatility is particularly common among younger or high-tech companies like Tesla, whose stock prices can change by 5–10% in a single day.
Systemic Risks:
  • Economic crises, inflation, or changes in interest rates can heavily impact the stock market. For instance, in 2022, the Federal Reserve’s rate hikes caused significant declines in tech sector stock prices.
Company Bankruptcy:
  • Investors may lose their entire capital if a company goes bankrupt, as seen in the 2020 collapse of Wirecard AG, which reduced its stock value to zero.
Tax Burden:
  • Capital gains and dividend taxes reduce net returns. For example, in the US, dividend tax rates for non-residents can reach up to 30%.

Stock Classification by Risk and Return

Investors can choose stocks based on risk levels and investment goals:
  1. Blue Chips: Established companies with stable businesses and consistent dividends, such as Procter & Gamble and Coca-Cola, suitable for conservative investors.
  2. Growth Stocks: Companies with high growth potential, like Amazon or Nvidia, suited for those willing to accept higher risks for significant returns.
  3. Cyclical Sector Stocks: Prices depend on the economic cycle (e.g., automotive sector), ideal for experienced investors.
  4. Small-Cap Stocks: Offer high return potential but involve greater risks due to lower liquidity and business instability.

Examples of Successful Investments

  • Nvidia stocks grew by over 200% last year due to advancements in artificial intelligence technology.
  • Tesla increased its market capitalization from $50 billion in 2019 to over $1100 billion in 2024, delivering multiple-fold profits to investors.
Stocks offer a way to achieve long-term capital growth. However, for successful investments, it is important to account for risks, study companies' financial health, and monitor economic conditions. This instrument is suitable for those prepared to endure short-term fluctuations for significant future growth.

Deposits as an Investment Instrument

A deposit is an agreement between a depositor and a bank in which the bank uses the client’s funds in exchange for fixed income in the form of interest. Deposits are a popular tool for preserving capital due to their reliability and simplicity.

What Is a Deposit?

A bank deposit is a savings method where funds are placed for a specific term or on-demand. Depending on the terms, a deposit can be:
  • Fixed-term deposit: The client agrees not to withdraw funds until the end of a specified term (e.g., 1 year, 5 years).
  • Demand deposit: Funds can be withdrawn at any time, but interest rates are usually lower.

Advantages of Deposits

Deposits remain a popular choice among investors who value stability and predictability.
Reliability and Capital Protection:
  • Bank deposits in most countries are protected by government guarantees. For example, in the US, the Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per depositor per bank.
  • In Armenia, deposits by individuals are insured up to 16 million AMD or 7 million in foreign currency equivalents through the Deposit Guarantee Fund.
Fixed Income:
  • Unlike stocks, deposit returns are fixed, allowing for accurate profit forecasting.
  • In 2024, average interest rates on fixed-term deposits in US banks range from 4.5% to 5% annually. In Armenia, Unibank offers rates up to 11.5% for AMD deposits, making them among the most attractive in the region.
Simplicity:
  • Opening a deposit does not require specialized knowledge, market analysis, or financial preparation, making it accessible to most depositors.
Psychological Stability:
  • Unlike stocks, deposits are not subject to market fluctuations, minimizing the stress associated with investing.

Risks of Deposits

Despite their reliability, deposits have limitations that should be considered before investing funds.
Low Returns:
  • Deposit interest rates are often lower than inflation rates, especially in high-inflation countries. For example, in the US, with inflation at around 3%, a 4.5% annual deposit yield provides only a modest real return.
  • In Armenia, AMD deposits offer higher returns than dollar deposits, but currency risk can erode real gains.
Limited Liquidity:
  • Fixed-term deposits require funds to be held until maturity. Early withdrawal may result in penalties or forfeiture of accrued interest. For instance, Unibank recalculates interest at a lower "demand deposit" rate upon early termination.

Deposit Classification

By Term:
  • Short-term (up to 1 year): Offer flexibility but lower rates.
  • Long-term (more than 1 year): Suitable for those who can lock in funds for a longer period to earn higher returns.
By Currency:
  • In national currency (AMD): Favorable when the economy is stable and free from devaluation.
  • In foreign currency (USD): Minimize currency risks, though rates are usually lower.
Deposits are a reliable capital preservation tool, particularly suited for investors with a low risk tolerance. In 2024, deposits in US and Armenian banks offer competitive rates, though their returns still lag behind those of stocks. However, for those valuing stability, deposits remain an attractive choice, especially given government guarantees and accessible terms.

Factors to Consider

Before deciding to invest in stocks or deposits, an investor needs to evaluate several key factors that determine the effectiveness of the strategy.

Risk Level

Different instruments come with varying levels of risk, which should align with your investment profile:
- Aggressive Approach. Suitable for those ready to handle high volatility and seeking maximum returns. For example, investing in growth stocks like Tesla or Nvidia can lead to substantial profits but also significant losses.
- Conservative Approach. Preferred by investors aiming to preserve capital. Deposits or blue-chip stocks (e.g., Coca-Cola, Johnson & Johnson) offer stability and moderate income.
Investment Goals
Investment goals determine the choice of instruments:
- Short-Term Liquidity. If maintaining access to funds is crucial, deposits with early withdrawal options are a better choice.
- Long-Term Capital Accumulation. To build capital over 5–10 years, stocks—especially dividend stocks or index funds—are more suitable.

Diversification

Diversification balances risk and return:
- Combining stocks and deposits reduces overall portfolio risk. For example, an investor might allocate 70% of their capital to stocks and 30% to deposits to maintain liquidity.
- Selecting assets from various economic sectors (technology, healthcare, financials) mitigates the impact of sector-specific risks.

Investment Strategies for 2024

A well-chosen strategy is key to successful investing. In 2024, investors should consider market trends and their personal financial goals.
Diversified Approach
Combining stocks and deposits remains the most effective strategy. Example allocation:
- 50% in growth stocks.
- 30% in dividend stocks.
- 20% in deposits.
The asset ratio may vary for different investors depending on their goals and risk tolerance.

Conclusion

Stocks are suitable for investors willing to take higher risks for potentially high returns. Deposits, on the other hand, are chosen to preserve capital and ensure stable income.
To maximize benefits, it is important to consider tax implications and long-term goals. For instance, dividend stocks or tax benefits offered through an Individual Investment Account (IIA) can help increase net returns.
Your choice depends on your investment profile, risk tolerance, and goals. In 2024, investors should combine these instruments and diversify their portfolios to achieve optimal results.