A certificate of deposit (CD) is a savings certificate, which is simply a receipt to provide proof of ownership for a deposit. The certificate may be issued for either fixed or time deposits and is issued by the deposit location (bank, credit union, etc). Usually, an individual will make a fixed time deposit which lasts for up to five years. The deposit is locked into the account and there will be a guaranteed fixed interest rate. The interest rate that you receive exceeds the typical rate for a standard savings account.
How Certificates of Deposit Work
There are two different types of certificates of deposit, small and jumbo. Small certificates of deposit will be any amount under $100,000 USD. Jumbo certificates of deposit will be any amount over $100,000 USD. The main difference between the two is that only the small certificates of deposit are insurable by the FDIC (Federal Deposit Insurance Corporation).
Once you determine how much you plan to invest with the certificates of deposit you will need to determine the period of the certificate. You can choose anywhere from half a year to 20 years. The term of the certificates of deposit will play a very important role in the overall value of the deposit. You have to make sure that you choose a sufficient length of time to see considerable returns but do not set the length too long if you may cash it out early. Early withdrawal of the certificates of deposit funds can lead to a significant penalty that will limit the amount of profits you make from the investment.
The only other serious controllable factor of the certificates of deposit investment is the interest rate. You can choose to have a fixed interest rate for the deposit. You may be able to lock in to a generous interest rate but this will depend on the current market. Keep in mind that if the market increases in value then you lose out on interest that could have been made with a variable interest rate set up. If you are looking to set up a long term certificates of deposit then the interest rate will likely be more generous so locking in may be worthwhile.
The Safety of Investing in Certificates of Deposit
If you are looking for a type of investment that eliminates any risk then a certificate of deposit would be a great choice. If you invest in any certificate of deposit under $100,000 USD through any bank that is insured by the FDIC then there is no risk of losing your money. You will be provided with a guaranteed return of your money with the specified interest rate being accumulated to the total value of the certificate.
If you are investing in a certificate of deposit over $100,000 USD then you cannot receive FDIC insurance so there will be some risk with this type of investment. As long as you invest through a trustworthy bank then there should be nothing to worry about though.
What to Know Before Investing in Certificates of Deposit
Before investing in a certificates of deposit you will need to read up more on exactly how they work. You should have a decent understanding on the terms of this type of investment so you can maximize your potential return. One thing to consider will be if you want to invest in a callable certificate of deposit.
Callable deposits may be terminated by the issuing bank, which means that the individual must create a new deposit. If you have this type of certificate of deposit then it is likely that the bank calls it if the interest rate goes down. This forces you to lose out on your higher interest rate if you have a fixed deposit. Only the bank, not the investor, is qualified to terminate the deposit if it is callable.
There are two things that you need to make sure you factor in when deciding on what investment to make in a certificate of deposit. This includes making sure that you use a reputed source for the certificates and that you know the difference between fixed and variable interest rates. If you invest in a certificate of deposit through a broker then check the reputability of the bank that will be issuing the certificate. You will also want to make sure that the bank is FDIC insured for deposits under $100,000 USD when investing in a small certificate of deposit. This will guarantee the safety of your investment. Also, checking the reputability of the certificates broker would be a good idea.
Certificates of deposit are a great choice of investment. They are very low risk and can provide you with a considerable return upon maturity of the certificate. If you are looking to lock up an investment that will guarantee you a return then this is definitely worth considering. Make sure you spend some time reading up on the various options for certificates of deposit before investing so you know how to best set up the certificate for your needs.