A Certificate of Deposit or a CD is a short to medium term investment method that is attractive for individuals who wish to grow their money in a safe way. A CD is essentially an agreement the investor makes with a bank or credit institution to deposit a sum of money for a period of time with the stipulation that they will not withdraw any of the funds until the CD reaches maturity (the financial term for the date the CD expires). In return, banks offer higher interest rates than they do for traditional savings or checking accounts.

There are both advantages and disadvantages to investing in a CD. The main advantage is that CDs are considered generally risk-free when made with an FDIC insured institution or a NCUA insured credit union. The FDIC insures CDs up to $250,000, which means that the money will not simply evaporate should the institution that has issued the CD become insolvent.

Another advantage to CDs is the high interest rate, which can either be fixed or variable depending on the institution. The interest on CDs can either be paid out as it accrues or added to the principle sum, thus increasing the overall yield. In addition, it is possible to use the ladder strategy to stagger the maturity dates of several CDS and therefore always have access to some of the money, if not all of it.

There are downsides to investing in a CD. One major disadvantage is that the investor will not reap as much profit on their money than if they invested in the stock market, for example. When investing money in a long-term CD with a fixed interest rate, the investor runs the risk of interest rates increasing over the length of the investment without being able to capitalize on them. While a variable interest rate does solve this particular problem, the investor then may end up with a worse deal should interest rates be slashed.

Another disadvantage is that the money that is held in a CD fund will not be accessible to the investor until the CD has matured. Withdrawing the money prior to maturity will incur a serious penalty; typically slashed interest rates. In general CDs are best for individuals who will not need to access their money for some time.

Before committing to any CD, shop around for the best interest rates. Smaller institutions sometimes offer higher interest rates than larger ones, but may not be FDIC insured. Ask about early withdrawal penalties before making any investments, as you never know when you may need the money tied up in the CD fund.