The term CD stands for Certificate of Deposit. A CD is simply a short- to medium-length investment. They are FDIC insured and are available for purchase at banks, credit unions, and savings and loans. CD's are a good way for some consumers to get higher interest rates on their money, but there are some issues associated with them that consumers should know about before signing up for one.
In basic terms, CD's operate like this: You will put a certain amount of money into the institution for a certain amount of time. The institution will use this money for various purposes. In exchange for investing your money with them, you are promised a predetermined interest rate on the money, as well as having your money protected by the FDIC. The FDIC is the Federal Deposit Insurance Corporation, and it protects your money in case the bank or savings and loan fails.
Buying CD's is a good, safe way to invest money but it does have some drawbacks. For one, once you buy the CD you are not allowed to withdraw that money without incurring a penalty fee. This is for withdrawals that take place before the CD matures. Another drawback can be the length of time that a CD takes before it matures. This length of time can vary greatly but it is common for many CD's to mature between 1 year and 5 years. There are shorter term CD's as well, and there are longer term CD's, some maturing at 10 to 20 years. It is important to understand the maturity length before you sign up for one, and to understand that this money will be tied up in the CD for that length of time.
A certificate of deposit is very useful for certain people. Because it is a very low risk investment it can be especially useful for elderly people and for young people who want to get started with their savings. It is also a good way to invest for those people who have limited amounts of money that they can invest.
All consumers should make sure that they are getting their CD from an FDIC-back source. Normally, you will know this if you are buying the CD on your own at your bank, but if you are using a broker to buy the CD for you, make certain that you know which bank is issuing the certificate of deposit, and that the bank is insured.
Before you buy your CD, sit down with the bank and find out how the interest rate works. You may be getting a fixed rate on your CD or you may be getting a variable rate. It is important to know which is being attached to your CD as this will affect your profit. If you are buying a jumbo CD (a CD that is over $100,000) make sure you talk about the issue of protection. The FDIC only backs up to this amount and you will want to know what the financial institution can do to help protect the money you invest above this limit.
Lastly, rates for CD vary so you may want to shop around to find the institution that offers the best rates for your certificate of deposit.
Are you one of the few who despite the financial turmoil has been able to save some cash? Do you have cash on hand because you sold the rest of your stock or mutual fund portfolio after watching it drop? If the answer is yes, I have one question for you, what are you going to do with it? With the stock markets down 40% or more, investing and making your savings grow has become a challenge. A safe investment for your money would be Certificates of Deposit or CD.
A CD is actually commonly called "time deposit". A certificate of deposit is somewhat similar to a regular saving account but with a twist. Unlike a savings account where you are free to withdraw anytime (up to 6 withdrawals per month, Certificate of deposits have fixed terms.
There are tons of CD terms, 1 month to 3 months or more, some terms are as long as 10 years. During this time, you can't withdraw your money, but you are guaranteed to earn fixed interest rate that's much higher than a traditional savings account rate.
The rule of the thumb is, the longer the term, the higher the interest rate. Certificate of deposits are offered by banks, thrift institutions, and credit unions. Your deposit is safe as it is insured by FDIC up to $250,000 per depositor.
If you are planning to invest in a CD there are tons of online resources to find the best CD rate.
Here is a small sample of current CD rates.
1. You can earn 2.40% on your deposit for a 1 month CD. The minimum deposit is $10,000.
2. Another bank offers as much 4.27% for a 12 month CD. There is a $500 minimum deposit for this provider.
3. For a deposit of $10,000 in a 5 year CD, you can earn up to 5.02%.
4. A seven month Certificate of Deposit (CD) currently yields 4.11%. This special rate is a promotional online CD rate and the minimum opening balance is $5,000."
5. GMAC Bank is offering a 3 month CD rate of 3.15% with an annual percentage yield of 3.25%. The rate is for balances of $500 or more. The penalty for early withdrawal for a 3 month certificate of deposit is 90 days of interest, basically all the interest you would have earned so be sure that you won't need your funds before locking in this CD.
So be sure you won't need access to your money when you invest in a certificate of deposit. If you are unsure when you might need access to your fund it's better to invest in only short term CDs, like a 1 to 3 months CD, instead of a longer term CD.
Certificate of Deposits allow you to earn easy money without risking your hard earned savings. However, I have a piece of advise for you, since financial institutions require that you don't withdraw your money for the duration of the Certificate of deposit term, you must deposit only the amount that you won't need during the term's duration. Otherwise, instead of earning interest, you will lose some of your interest earned because banks charge a penalty for early withdrawal.
Both Peter Kenny & Gen Wright are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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