According to the Federal Deposit Insurance Corporation (FDIC), certificates of deposit (CDs) are among the safest and most reliable places for your money. A CD is a unique type of deposit account with a bank or financial institution that usually offers a higher interest rate than is typically offered in a regular savings account. CDs traditionally pay a fixed interest rate until they reached maturity. Nowadays, investors can often choose among variable-rate CDs and long-term CDs. There are pros and cons associated with certificates of deposit.
Low Risk
The FDIC says when you purchase a CD, you invest a fixed sum of money for a set period of time, ranging from six months to five years or even longer. In return for the use of your money for this fixed period, the issuing bank pays you interest at regular intervals. When the time comes to cash in your CD, you are guaranteed to receive your initial investment in addition to any interest that has accrued.
Lower Returns
Certificates of deposit are typically low risk; in fact, the risk of losing money is extremely low, according to Financial Planning Advicescom. However, in exchange for this high security, CDs tend to offer lower returns.
W.hile CDs have traditionally been purchased through local banks, a growing number of brokerage firms now offer CDs. These so-called "deposit brokers" may be able to negotiate a higher interest rate by guaranteeing the financial institution a specified number of deposits.
Early Withdrawal Penalty
If you decide to redeem your CD before its maturity date, you may be required to pay an "early withdrawal" penalty or give up a portion of your earned interest. Financial Planning Advices.com recommends contacting your bank to learn the specific penalties of an early withdrawal of your CD.
Insured Investment
Unlike other investments, the FDIC insures CDs up to $250,000 as of December 2009. This makes them a completely safe investment option because your principal is protected from loss up to this amount.
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