A certificate of deposit is a conservative, safe way to invest money. The interest on this type of investment is low, but a CD is considered far less risky than investing strictly in stocks, which may put the principal amount of an investment in jeopardy. In an October 2009 report, MSN Money rated certificates of deposit as a "10" in terms of safety due to the fact the principal and interest are federally insured for up to $100,000 per depositor. However, there are rules for certificate of deposit withdrawals that may prevent this investment type from reaching its full potential.
Maturity Date
The U.S. Securities and Exchange Commission defines "certificate of deposits" as a deposit made through bank or thrift institution. Investors agree to invest the money for a fixed period of time, which can be six months, a year, two years or longer. During this time, the principal bears interest, which can be fixed or variable. The issuing entity will pay the investor the interest on the account at specified intervals. A CD matures after its term has lapsed. Investors may then redeem the principal investment, as well as additional interest earned.
Withdrawal Penalties
Investors are not forbidden from withdrawing their money before a certificate of deposit matures. However, they will be subject to early withdrawal penalties. According to MSN Money, this precludes the investor from receiving all or part of his interest. Depending on the term of the CD, investors typically lose one to six months of interest if the principal is withdrawn early. If the CD has not earned interest, the issuer may even take a fee out of the principal. CDs offered through brokerage firms typically carry more risk, notes the SEC. Should investors try to withdraw their money before the CD matures, they may part ways with a considerable amount of principal.
Call Features
Investors may also find that their certificate of deposit is "called" by a bank before it reaches its maturity date. The SEC indicates that long-term CDs with a good rate of return may be terminated by a bank when interest rates plummet, forcing investors to look around for other ways to invest--or subject them to invest in a CD with a lower rate of return. When a bank calls a CD before its maturity date, the investor receives the total amount of his or her principal, plus the amount of interest that the investment has accrued.
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