A Short Introduction to Certificates of Deposit (CDs)

What is a certificate of deposit (CD) and why would you invest in one? CDs are less risky than other investments and can provide a relatively good rate. Learn more in our short intro.

What are Certificates of Deposit?

Certificates of Deposit, commonly called CDs, are financial products that work a little like a savings account but with significantly higher interest rates.

When you invest in a CD, you are agreeing to deposit money for a set amount of time. During that time, you cannot take money out. It will remain in your account throughout the agreed upon time period.

Typically, the longer the investment, the more you earn in interest. Terms can range from months to years and you’ll select the time period before depositing your money.

Although other financial investments like stocks tend to have better returns, they come with higher risk. CDs are a conservative way to invest your money. Here are a few other pros and cons to consider before investing.

How Certificates of Deposit Work

Pros and Cons of CDs

One of the main draws of buying a CD is that the money is safe and will be returned to the buyer. They don’t come with the same types of financial risks that stock investments always do.

Like we said earlier, the interest rates offered for this type of financial product are generally higher than if the same amount of money was placed into a savings account for the same period of time.

Once the CD matures, meaning the term has ended, you can either withdraw your original deposit plus interest or reinvest it in another CD.

This makes CDs very easy to manage because once you are set up, you don’t need to do anything until you start researching new investment options around the time the CD matures.

On the negative side, once you select your CD and terms, you cannot withdraw money until the CD matures. If you do, you may face a penalty or fee.

Although the interest rates are better than traditional savings accounts, you may be able to find an online savings account offering better interest rates.

Plus, if you have a 5 or 10 year CD, interest rates could change while your money is invested. If interest rates increase, you won’t be able to benefit. On the other hand, if the interest rates decrease, you’ll still be earning interest at the original, higher amount.

How to Invest in a CD

To get a certificate of deposit, consumers can visit a bank or a credit union. To get the best interest rate, shop around and be willing to do so each time the CD matures and the money is available in order to take advantage of the best rates.

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