What is a CD?
A CD (Certificate of Deposit) is similar to a regular saving account in that your funds are federally insured against loss (up to as much as $250,000). But unlike a regular savings account, when you deposit money into a CD you agree to leave the deposit untouched for a specified length of time -- usually stated in the number of months.
In exchange for this agreement, you will normally earn a higher rate of interest on certificates of deposit than you would on a regular savings account. And the longer you agree to leave the CD untouched, the higher the interest rate you can expect to earn.
How Long Must I Agree To Leave the CD Untouched?
The length of time you agree to leave the certificate untouched is up to you. You can usually choose any number of months between 1 and 120 months. However, regardless of which length of time you choose, if you withdraw the CD before it matures you may be assessed an early withdrawal penalty, or end up forfeiting some or all of your interest earnings. And if that happens, you might have been better off depositing the funds into a regular savings account, since a smaller interest rate is better than no interest earnings at all.
Is Investing in CD's Complicated?
Not at all. Investing in a CD is perhaps the easiest of all investments -- which makes them one of my personal favorites. But of course, like any other type of investment, the savings institutions are working hard to complicate certificates of deposit to the point of needing an investment advisor to guide you. You can now choose between fixed, variable, and special feature CDs. Variable CDs allow savings institutions to entice CD investors in with higher interest rates, leaving the door open to lower the rates later.
Where Can I Purchase a CD?
While most people purchase certificates of deposit from banks, which is usually the safest way to purchase them, you can also purchase CDs from "Deposit Brokers." Deposit brokers can offer higher interest rates on brokered CDs because they negotiate bulk-purchase deals with institutions in exchange for bringing in a large group of CD investors. However, as with any other type of investments, higher rates of returns usually comes with higher risk, so be sure to do your homework before making the purchase.
Where can I Get Unbiased Information?
For an in-depth, unbiased description of certificates of deposit, be sure to check out the U.S. Securities and Exchange Commission's report titled, "High-Yield CDs: Protect Your Money By Checking the Fine Print."