Brokered CDs vs. Regular Bank CDs
Most people are aware that banks and credit unions issue certificates of deposit but are surprised to learn brokerage firms also issue certificates of deposit. While the concept of a brokered CD is similar to a bank CD, there are a few fundamental differences you should be aware of before investing in a brokered CD account.
These days both regular bank CD rates and brokered CD rates are low so don't expect to see much of a difference in the interest rate between these types of accounts. Whether or not you choose a brokered CD account over a regular bank CD account, you should have an understanding of brokered CD accounts and how they differ. Let's start out with the similarities between brokered CDs and bank CDs.
Similarities of Brokered CDs and Regular CDs
Risks of Brokered CD Accounts
The main risk of a brokered CD account is that if you need access to your principal before the maturity date, you may end up risking some of your principal when trying to cash out. With a regular bank CD account, you can take an early withdrawal penalty and forfeit some of the interest you earned on the account.
Unlike a bank CD, the brokerage house doesn't "buy back" the CD early from you like a bank would. You have to sell the brokered CD to gain access to your principal. There are markets in which you can sell your CD. These markets are not liquid, which means you might not be able to get what your paid for the CD and you might not be able to sell it at all.
Selling a Brokered CD in the Secondary Market
The secondary market for brokered CDs is like any fixed income security market. There are different CD valuations and secondary market prices are susceptible to fluctuations in CD interest rates. If CD rates increase, the market price of outstanding CDs will generally decline, creating a potential loss of principal if you decide to sell them in the secondary market.
When you weigh the differences, risks, and advantages between both types of accounts, I would say traditional bank CDs are your best bet. If you get into a financial position that requires you to sell your brokered CD, you might not get back 100 percent of your principal. The only benefit to a brokered CD is being able to have more than the $250,000 FDIC coverage while having only one account.
CDARS is Another Option
Another type of CD account that also allows you to have more than $250,000 in FDIC coverage with a single account and without having to sell in a secondary market in order to liquidate your account. The service is called the Certificate of Deposit Account Registry Service (CDARS). You can open one account (up to $50 million) and your principal is spread among many difference banks to give you full FDIC insurance coverage of your account.
Neither a Brokered CD or CDARS CD Have the Best CD Rates
You won't get the best CD rate available on a brokered account or a CDARS account. You can search for the best CD rates right here by searching our rate lists: RatesORama.com
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