A certificate of deposit or CD is an excellent way for individuals to invest their money safely. CDs work in a similar way to savings accounts in that the financial institution pays interest on the principle, however interest rates are generally more favorable for CDs. Why? Because of the agreement made when the CD is purchased. Basically, the investor agrees to deposit a sum in the bank and keep it there for a specified amount of time. The bank creates a promissory note that obligates them to pay back the loan once the CD reaches maturity (the financial term for the date of expiry). In return for honoring the terms of the CD, the bank pays a high interest rate on the CD that can either be paid out as it accrues or added to the principle sum.
Once you’ve decided to invest in a CD, you may be at a loss as to where you can find one. Banks and credit unions are the most common issuers of CDs. It’s always preferable to invest in a FDIC insured bank or NCUA insured credit union as this insurance will protect your money should the institution become insolvent. The FDIC insures CDs for up to $250,000. Although smaller institutions that do not have FDIC insurance will offer higher interest rates, their CDs are a riskier investment despite the promise of better profit.
In order to find a financial institution that offers the best interest rates, you can shop around in your area. Many institutions that need deposits often offer great rates on CDs. Online only banks also sell CDs and can often give customers a better deal due to their low overhead. Finally, you can work with a brokerage firm to find the best CD rates available. However, a brokered CD can be expensive to get out should you need to withdraw funds before maturity.
Keep in mind that although CDs are generally risk-free, they will never yield as high a profit as investments in the stock market do. In addition, the investor must be comfortable with having their money be inaccessible for the period of the CD. There can be harsh penalties for early withdrawal, including the loss on three to six months of interest depending on the institution.
