A certificate of deposit, or CD, is an amount of money invested with a financial institution for a specified period of time at a designated interest rate. CDs may be purchased through a bank that either has physical locations or operates entirely online. They may also be obtained through a brokerage firm, but beware because these may charge brokerage fees when the CD matures.
There are two important items to consider when investing in CDs and the first is the term. The money must be left in the account for the entire CD term or it may be subject to early withdrawal penalties and possibly interest forfeiture. Terms may range from six months to five years or more and the CD may be redeemed at the end of the term or renewed for another term.
When a CD is redeemed at the expiration of its term, the CD holder will receive the money originally invested plus any interest that accrued during the term. Investing in CDs is a great way to earn a higher rate of interest than is offered by most checking and savings accounts. Interest rates are the second important item to consider when investing in CDs.
Interest rates may be either fixed or variable during the term of a CD. Long-term CDs tend to have higher interest rates, a benefit to those who are willing to tie their money up for a long period. Some high-yield and long-term CDs have a call feature. This means that the bank may terminate the CD after a certain period of time. In situations where interest rates fall drastically, a bank may call its high-yield CDs to avoid having to pay out a lot of money at the end of the CD’s term.
When making the decision to invest in a CD, think about your financial situation and whether you can stand to be without the money. Find out the maturity date and any call features on the desired CD and confirm the CD’s interest rate and whether it is fixed or variable. Last but not least, learn about any early withdrawal penalties or interest forfeitures. You will then be well equipped to make a smart investment in a CD.