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Certificates of Deposit - A Low Risk And Safe Investment

Make sure your excess money is earning as high a rate of return as possible. Certificates of Deposit offer you a low risk and safe way to improve your investment earnings.

A Certificate of Deposit (CD) is a Federal Deposit Insurance Corporation (FDIC) insured time deposit issued by banks and brokerage firms across the country. Technically, a CD is a promissory note the issuing bank delivers to you. You are essentially loaning your money to a bank that will, in turn, repay you with interest at the end of the term.

CD's generally carry a fixed rate of interest and are very easy to open. In most cases, you can open a CD with as little as $500. The higher the amount of your deposit, the higher the rate of return.

CD's are relatively safe investments; therefore, the rate of return may not be as aggressive as other investment accounts. Generally, the longer the term you select, the higher the rate of return. CD's are available in terms as short as seven days and as long as several years. The most common are three-, six- or twelve-months, and three- or five-years. You should bear in mind you will have to pay a penalty for early withdrawal from a CD. See the FDIC article Certificates of Deposit: Tips for Savers.

Benefits of CD's

Take a look at some of the benefits offered by CD's:

  • Safety
  • - CD's purchased at banks, savings and loans (S&L's), brokerage firms, and other institutions are insured under FDIC guidelines.
  • Selection
  • - Institutions offering CD's usually have a wide selection of types and terms with different levels of investment and return to meet almost every investor's short- and long-term goals.
  • Ease of Principal Reinvestment
  • - Most times, financial institutions will allow you to have interest and dividends paid by your CD automatically reinvested into other funds and accounts you keep at their institution.

Evaluate both sides of the coin before you decide to purchase a CD:

  • Fixed Investment
  • - When you buy a CD, you are making a commitment to tie up your money for the duration of the CD's term.
  • Penalty
  • - If you need your money before the term expires, you may pay a high penalty.

Types Of CD's

The marketplace has recently added some unique CD products worth investigating. Many banks are now offering a variety of CD's that provide more flexibility than the more traditional CD:

  • Rising Rate CD
  • - If you purchase a rising rate CD, and interest rates rise, your rate of return will increase accordingly.
  • Step Rate CD
  • - This type of CD guarantees certain increases in the percentage of return throughout the term and at specified intervals.
  • Expandable CD
  • - These are beneficial if, after your purchase, interest rates fall. If you purchased an Expandable CD, you can add money to it. If it was purchased at a rate higher than today's market, you would benefit from the higher rate.
  • Market Index CD
  • - These very unique CD's may generate additional return to the holder based on the changes in the Standard & Poor's 500 Index.

Keeping Funds Accessible

CD's can be a good investment choice. Some investors like to use an investment strategy called "laddering". This means you buy multiple CD's with varying terms so that all of your funds are not tied up at once. For example, to start out, you can buy one CD with a term of three months, and one with a term of six months. When the first one matures, you can either use the money if you need it or reinvest it in a six-month CD. Make sense? This way you will always have access to at least some of your money without having to pay a penalty.

If you currently have an adequate amount of savings available to you, consult several banks to investigate the type of CD's offered. And, be sure to evaluate all of your savings options carefully before making an investment decision. For information on savings and other investing strategies, read the related Knowledge Center Articles.

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