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GICs vs. The Stock Market

In the ever-changing landscape of investment opportunities, the spotlight has shifted in recent times towards a traditional financial investment instrument that has been making a comeback: guaranteed investment certificates (GICs). As interest rates have soared, GICs have gained prominence, becoming more well-known for their attractive returns. In the past year, they have been quietly securing a place in investors' portfolios, offering stability amidst the fluctuating tides of the stock market.  

While the stock market continues to capture headlines with its volatility and potential for substantial gains and losses, GICs operate in a subdued manner, earning a place as a dependable investment choice. 

So, how do GICs compare to stocks? To make informed decisions about your money and future, it's essential to examine the mechanics, risks, returns, and time commitments associated with each of these investment options. Let's dive in! 


How do GICs and stocks work?

GICs are investments that pay you a guaranteed rate of return in exchange for locking in your money for a set period of time. For example, you might commit to keep your money in a GIC for a period of two years and be guaranteed a return of 5%. Terms range from 30 days to 5 years and sometimes longer, and interest rates vary widely depending on the financial institution. The Big Five banks typically pay much less interest on GICs than smaller financial institutions like credit unions.

Stocks are investments that let you buy shares in a company, with the option to resell them later at their market value. For example, if you had bought a share in Apple Inc. on December 1st, 1980 for 61¢, you could resell it today for approximately $195. Many companies also pay dividends to their shareholders, making stocks an attractive way to grow wealth over the long term. You can buy and sell stocks as frequently as you want. And it’s nearly impossible to predict what a stock might do over the short or long-term.

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The benefits and risks of GICs vs. the stock market

The biggest benefit of GICs is the guaranteed part. It’s nearly impossible to lose money on a GIC investment. When you invest in a GIC, you are guaranteed to get your principal and interest at the end of the term. And if you buy a GIC from a bank that’s covered by the Canada Deposit Insurance Corporation (CDIC), your deposits are backed by the Federal Government up to $100,000. If there were an economic catastrophe bad enough to wipe out your GIC investments, you would have much bigger problems to worry about.

With stocks, however, there are no guarantees. There are very few people who bought shares in Apple in 1980 and are still holding them almost 40 years later. There are also people who lost massive amounts of money holding shares in companies. An older example of this is Sears Holdings, whose share price has fallen from a high of $134.51 in April 2007, to around $0.37 on October 23, 2018. It’s possible to lose every penny you invest in stocks.


How do GIC returns compare to stocks?

GIC rates closely compare with inflation. At the time of writing, the best GIC rates in Canada are 5.50% for a 1-year non-registered GIC, and 5.00% for a 5-year non-registered GIC. GICs pay simple interest (no compounding), so $1,000 invested in a 5-year GIC at 5.00% would earn $276 in interest over its term.

Stock values are set by a mix of the company’s earnings and profits, future outlook, and the willingness of people to invest. The rules of supply and demand are in effect – too many investors with too few available shares will bid up the price, while a glut of sellers will force prices down.

While it’s impossible to predict how individual stocks will perform, you can get a sense of the overall market by looking at the average returns of various indices (groups of stocks). For example, the average 1-year return of the S&P 500 index over the last 5 years is 11.34%, as of the end of June 2023. The average 1-year return of the S&P TSX 60 index is 7.52%. And the average annual return of the NASDAQ-100 is 31.02%. Past performance doesn’t guarantee future success, however, and these averages vary widely. It’s safe to say that a diversified portfolio of stocks will yield significantly higher returns than GICs over the long term, but there will be fluctuations along the way.


Investing your time in GICs and stocks

Whether you choose to invest in GICs or stocks, you’ll be making an investment of time as well.

With GICs, you can’t access your money until the term is up; your money could be kept in a single GIC for the time period selected. That’s fairly straightforward and can be helpful if you’re the kind of person who has trouble leaving your savings account untouched.

With stocks, the best returns come when you invest over the long term; few people make any money from day trading. Most stock pickers don’t get better returns than the whole market. As well, commissions for buying and selling stocks can be expensive. For these reasons, the best way to get a solid return from stocks is to invest in the whole market and hold your investment for a long time – several years or more.

With stocks, you have the option to withdraw at any time. But by taking your money out early, you might miss out on long-term market growth.


Help me decide: GICs or stocks

The investment decisions you make depend entirely on your goals, and how you approach risk. Don’t forget risk goes both ways – you may not be able to tolerate the risk of missing out on higher returns investing in the stock market, just to have a sure thing with GICs.

Typically, the best way to invest is to keep a widely diversified portfolio that contains a little bit of everything, including stocks and GICs. You can also adjust it based on your time horizon. For example, if you’re saving for retirement in your 30s and 40s, you may choose to make your portfolio more aggressive (include more high-risk investments like stocks with the goal of earning more investment income). As you get closer to retirement, you may then choose to move more of your portfolio into stable investments like GICs.

A financial adviser can help you make these decisions about how to manage your investments over time based on your goals.


The bottom line 

A balanced portfolio will likely contain stocks and GICs, as well as a variety of other investments.

If you’re making a stark choice between stocks and GICs, your choice comes down to your needs. If you need a stable investment that’s guaranteed not to lose money, and you’re comfortable with locking in your money and foregoing the possibility of higher returns, a GIC might be right for you. If you need an investment with more flexibility that could pay a higher return in exchange for more risk, stocks might be the answer.

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