A Certificate of Deposit, better known as a CD, is a short-term to medium-term investment that is very similar to a savings account. In exchange for a predetermined amount of interest (usually higher than a money market account) you agree to lend money to your bank for a certain period of time.
Many consider CDs a risk-free investment as most CDs are insured through the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). CDs are considered time deposits. When the specified term has ended, the CD has reached maturity. Typically, longer term CDs offer greater interest rates. When the term has ended, you are able to withdraw your money or reinvest it. CDs are a great way to invest money in a safe and secure way. Financial institutions that are FDIC or NCUA insured guarantee these investments up to a certain amount of money. Additionally, you have the security of knowing exactly how much interest you will earn at the end of the term. Many people appreciate this type of secure investment rather than the insecurity of investing in a volatile stock market.
After the CD has reached maturity, you can decide what to do with the money. Some people choose to withdraw it while others choose to reinvest all or part of it. Your bank or credit union can explain the options to you. However, be sure to inform your financial institution of your wishes before the term has expired. Some banks will automatically reinvest, or rollover, your money into a new CD if they haven’t been told otherwise. There is usually a grace period to allow you to make a decision about reinvestment.
CDs are one of the safest investments you can make. However, be aware of the fact that you are agreeing to a specified term when you purchase a CD. If you need to withdraw the money before the term has ended, you may face stiff penalties, including the loss of any accumulated interest or even the loss of some of the principal. Each financial institution will have paperwork describing these policies.
While the interest rate of a CD is typically higher than the interest rate of a savings account, some people would rather invest in the stock market for a potentially higher return, even with the considerable risk of the stock market. The Certificate of Deposit offers a guaranteed return as long as you meet the term requirements.
CDs can be purchased at your local financial institution. Both banks and credit unions offer these products. The process is very straightforward, especially if you use your regular bank. CDs usually have a minimum deposit, and many banks offer better rates for larger deposits. After completing some paperwork, money can be transferred from your personal account into a CD. It is important to note that some banks do offer higher interest rates than others. It might be worth your time to take a look at a variety of banks and credit unions before making your choice.