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Certificate of Deposit Investing in Today’s Economy
 

Certificate of Deposit Investing in Today’s Economy

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Certificate of deposit accounts (CDs) are time deposit accounts that can be opened at banks, saving thrifts, credit unions or brokerages. CDs typically offer higher CD rates than a savings account rates. You invest a fixed some of money for a fixed period of time, which can be from 30 days to 10 years. For the privilege of having your money the bank or credit union pays you an interest rate. This rate is referred to as a CD rate.

The longer the CD term, the better the CD rate you receive. The longest term CDs more than likely will have the best CD rates. When you have your money locked into a CD the financial institution borrowing the money from you can invest the money. Basically, borrowing at a lower rate from you and investing at a higher rate. This is how banks and credit unions make money.

If you invest in a 12 month CD your money is locked up for 12 months. You do have the option of cashing in your CD before the maturity date for a fee. This is referred to as an early withdrawal penalty. The penalty can be part of the interest earned or all of the interest earned depending on the CD term. 

Certificates of Deposit offer investors risk free investments that have their principal 100% guaranteed by the U.S. Government for up to $250,000.  Deposit accounts, including certificates of deposit, at most banks are insured by the Federal Deposit Insurance Corporation (FDIC). When investing in a bank CD make sure the bank has their deposits insured by the FDIC.

Deposit accounts, including share certificates, at Credit Unions are insured by the National Credit Union Administration (NCUA) for up to $250,000. Make sure to invest only in certificates of deposit that are offered by credit unions that belong to the NCUA.

There are many ways CD interest is earned and paid. A CD account can have interest paid monthly, quarterly, annually or at maturity. Interest earned on the account is usually paid daily giving the investor a higher annual percentage yield (APY) because interest is compounded. Compound interest is, interest already earned, earning interest.

There are many variations of CD accounts and CD investing has become more complicated over the past decade. There are fixed rate CDs, variable rate CDs, regular CDs, retirement account CDs,  jumbo CDs and many others, too many to list here.

Here is a list questions to ask when investing in CDs.

  • What is the maturity date of the CD account?

  • Can the CD  be called by the bank - basically the bank cancels the account?

  • Is the CD interest rate fixed or variable?

  • How is interest compounded?

  • What are the early withdrawal penalties?


Now that you have a good understating of what certificates of deposit are and how to invest in them you need to compare bank CD rates and credit union CD rates.

There are many financial institutions that offer certificate of deposit accounts. Make sure to shop around for the best CD rates at banks and best CD rates at credit unions before you invest your money.
Author: James Martin
April 29th, 2011