Certificates of DepositCertificates of Deposit


Certificates of Deposit, or CDs, are a type of investment. They are popular among investors who are adverse to risk. In this article, we will go over the basics of certificates of deposit to help you decide if utilizing one is right for you.

CD Basics

A CD is a promissory note that has a fixed interest rate and maturity date. Typically, they are issued by banks or credit unions. They are insured by the FDIC for up to $250,000 per person. CDs can be issued at pretty much any amount, but most institutions will not issue them for less than $1,000. It is important to note that your access to the fund is limited until you reach your maturity date. Accessing funds before this can result in a penalty.

Negotiable vs. Non-Negotiable

One varied of CD is negotiable or non-negotiable. Most are non-negotiable. This means that they are not transferable. So, they cannot be sold, purchased or exchanged. Whereas negotiable CDs can be sold in the secondary market. However, these are usually only issued for amounts over$100,000 and only for short term between two week and one year.

Specialty CDs

Besides the average CDs that most banks issue, there are also specialty CDs. These offer some extra options that may be of benefit to you.

  • LiquidCDs: This type of CD has a little to no penalties for early withdrawals. However, the easy access to fund comes at the cost of a lower rate of return. But you do have the ability to roll it over into a higher paying CD.
  • Bump-UpCDs: Bump-up certificates of deposit offer easy withdrawals like liquid CDs and have the same lower interest rate. But they allow you to take advantage of higher interest rates by applying a new rate to the CD. They require high deposits and they also limit the number of times that you can bump-up your interest rate.
  • Step-UpCDs: This type of CD combines components of liquid and bump-up CDS with an added twist. These CDs will raise your interest rate at regular intervals that are outlined on a preset basis.
  • IRA CDs: IRA CDs are certificates of deposit that are held inside of an individual retirement account. Due to this, they are tax-advantaged.

CD Pros and Cons

Like all investments, certificates of deposit have both pros and cons. Some of the benefits of CDs include:

Some of the downfalls of CDs include:

  • Lower rates of return than stocks
  • Limited access to cash
  • Fee if you make a withdrawal before the maturity date

It is important to weigh the benefits and downfalls of any investment before deciding to utilize one. Then you can decide if it will work for your situation.

Getting a CD

If you think a certificate of deposit is a good fit for your portfolio, your next step should be to shop around for the highest interest rates. Then contact your local bank or credit union with help in setting one up.

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