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Investing in CDs-Certificates of Deposits
CDs, or certificates of deposits, are relatively low-risk investments, meaning there's a low risk of losing your investment, but that also
means they have a low yield. CDs have higher interest rates than savings accounts, but lower interest rates than stocks and sometimes bonds.
But, unlike many other types of investments, CDs are insured by the FDIC for up to $250,000.
When you put money in a CD, you promise to leave it there for a certain period of time. In exchange, the bank pays you a higher interest rate on your money. CDs have a maturity date that could be anywhere from six months to five years from the date you made the deposit. When the CD matures, you're able to withdraw the money you deposited along with any interest that accrued on your investment. If you withdraw money from your CD before it matures, you face a CD early withdrawal penalty that's usually several months of interest earnings. The bank may be able to take some of your deposit if you haven't accumulated enough interest to cover the penalty.
During the life of the CD, your interest could compound a few different ways. It might compound monthly, quarterly, bi-annually, or annually. The longer you leave your money in a CD, the higher interest rate you'll receive. For example, a five-year CD will have a higher interest rate than a six-month CD, but longer-term CDs also have higher early withdrawal penalties.
You can purchase a CD directly through the bank or through a CD broker. CD brokers are sometimes able to give higher interest rates because they can negotiate with the bank in exchange for bringing a larger number of investors to the bank. If you choose to invest through a CD broker, you should know which bank your money is being deposited.
When you invest in a CD, make sure you understand the early withdrawal penalties. Know the exact amount you'll be charged and what actions trigger the penalty.
Once your CD matures, you'll have a certain period of time to decide what you want to do with the money. If you don't give other instructions to the bank, your money will be rolled over into another CD. Write your CD maturity date on your calendar so you're able to stop your money from being rolled over if you don't want it to.
There may be minimum deposit requirements on CD investment. Often, you need to deposit a minimum of $1,000 to buy a CD. If you don't have that much money to invest, a savings account is a better option for your money. You can always save up until you reach the minimum deposit requirements then buy a CD.
CDs are not for everyone. If you think you might need the money before CD matures, it's not a good idea to invest in a longer-term CD. Pulling out your money early will negate the interest rate earnings you accumulated.
As with any other product you purchase, you should shop around for the best CD rates and terms before settling on a bank's CD.
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