CERTIFICATES OF DEPOSIT

WHAT YOU NEED TO KNOW ABOUT CD CERTIFICATES OF DEPOSIT

A certificate of deposit is an agreement to deposit money for a fixed period with a bank that will pay you interest. You can choose to invest for three months, six months, one year or five years. You will receive a higher interest rate for the longer time commitment. You promise to leave all the money, plus the interest, with the bank for the entire term.

In effect, you are lending the bank your money in return for interest. The CD is a promissory note that the bank issues you.

Also, while your money is in a CD, interest rates could increase (meaning more bang for your buck) but you wouldn’t be able to take advantage of them until the CD matures without paying a penalty.

BROKERED CERTIFICATE OF DEPOSIT

Purchasing a CD is as easy as going to a local bank, but brokerage firms also sell CDs. These brokered CDs are actually pieces of larger CDs. The broker simply compiles the deposits of several investors and buys one, large CD with the money. One advantage of doing this is that investors might be able to benefit from the broker's access to information from institutions across the country and its ability to negotiate special higher interest rates. Many brokers do not charge investors a fee to invest in these brokered CDs. Instead, they usually receive a commission from the issuer.


REVIEW THE RISKS
In general, CDs offer higher returns than savings accounts and traditional money market accounts, which are more liquid. This makes them excellent short- to medium-term investments (typically from three months to seven years) for risk-averse investors, especially those who want to be sure there is a specific amount of money available at a specific time. An important one is that a CD is locked in at a specific rate for what could be a long time, which may result in missed opportunity if rates increase. And unlike Treasury notes, the interest on CDs is not exempt from state and local taxes