CD Basics (Certificates of Deposit)

A certificate of deposit or CD is a time deposit, a financial product commonly offered to consumers by banks, thrift institutions, and credit unions.

CDs are similar to savings accounts in that they are insured and thus virtually risk-free; they are “money in the bank” (CDs are insured by the FDIC for banks or by the NCUA for credit unions). They are different from savings accounts in that the CD has a specific, fixed term (often three months, six months, or one to five years), and, usually, a fixed interest rate. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest.A CD or Certificate of Deposit is one of the safest and liquid forms of investment available. Insured by the FDIC (Federal Deposit Insurance Corporation), CDs are a type of interest earning deposit account. Unlike savings accounts, a CD requires a fixed sum of money for a fixed period of time ranging from six months to several years.

CDs are attractive to investors because they typically pay a higher rate of interest than a traditional savings account and have FDIC insurance up to $100,000. Don’t expect to get rich from investing in CDs but they are a valuable addition to any portfolio to assist in providing liquidity. Use these quick tips to get started in purchasing and investing in CD’s:

1. Use a ladder approach to purchasing certificates of deposit. By using a ladder approach you spread out the interest rates and redemption times. Should you need to cash in a CD you will have more options available and lose the least amount of potential interest.
2. If investing more than $100,000 spread it between two or more banks or brokers. Remember, FDIC insurance only covers up to $100,000 per entity.
3. Confirm the maturity date – see it in writing before signing or finalizing the purchase. CDs can mature in as little as six months or as long as twenty years.
4. Confirm the interest rate and yield. Is the interest rate fixed or variable?
5. Understand penalties and early withdrawals. Pre-payment penalties, early withdrawal fees and other related items can dramatically impact yield.