What Is A Certificate Of Deposit?

What Is A Certificate Of Deposit?

by May 23, 2019Investments

There are many options for investors looking for both short and long term opportunities. While stocks and bonds often get the lion’s share of attention, many investors regularly rely on certificates of deposit (commonly referred to as “CDs”) as well. Certificates of deposit are one of the safest investment tools available for both long-term and short-term savings.

What Is A CD?

A certificate of deposit is a type of federally insured savings account. CDs have a fixed interest rate and a fixed withdrawal rate, which is called the maturity date. CD’s typically don’t have monthly fees either.

You can buy a certificate of deposit from almost any bank, and credit unions offer a product called a “share certificate” that is essentially the same thing as a CD.

When comparing a certificate of deposit to a traditional savings account, CDs differ in a few important ways:

1) A savings account lets you deposit and withdraw funds freely. But with a CD, you usually agree to leave your money in the bank for a set amount of time, called the term length, during which time you cannot access the funds without paying a penalty.

2) Term lengths can be as short as a few days or as long as a decade, but the standard range of options is between three months and five years.

For all CDs, the longer you leave your money in the bank – the longer your term length – the higher the interest rate you’ll receive. Interest rates are typically fixed for the length of the term committed to, but there are a few exceptions.

Benefits Of Using CDs

Certificates of deposit are great for those who have money set aside that they know they won’t need access to for a certain period of time. CDs are also an excellent option for those who may have suddenly come into a large inheritance or lottery winnings and need to park their money while they make a long-term financial plan.

Another benefit of CDs is their rock-solid security. Savvy investors and financial planners often recommend mixing CDs into a larger investment portfolio (which will also include stocks, bonds, and other financial instruments) to provide a sort of safety net in case markets go down.

Unlike other types of investments, it is nearly impossible to lose money with a certificate of deposit. As long as you don’t pull your money out early and incur a penalty, you are guaranteed a positive return.

How To Get Started

Getting started with CDs is much easier than buying stocks or bonds. In most cases, you can just walk into your local bank and buy one. If you want to do some research first, there are plenty of online resources that list CD rates offered from banks across the country.

Before you commit to purchasing a certificate of deposit, consider speaking with a financial planner first. Especially if you are planning to invest a significant sum of money and/or commit to an extended term length (five years or more). There may be better options for you that a financial planner can advise you on.

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