A Certificate of Deposit or a CD is one of the most favored and safest ways to make investments for a short or medium period of time. CDs are available at most of financial institutions, such as national/international banks and credit organizations.
Understanding Certificate Of Deposits
A CD can be simply understood as a financial instrument that offers a term-based assured return to the owner. By getting a CD, you basically agree to lend a certain amount of money (principal) to the issuing institution for a fixed period of time (term). This is why they are referred to as a type of Term Deposit.
The institution lends this money at higher rates or invests it to earn a profit. To offer you a financial incentive, the institution promises to pay a fixed (pre-determined) Rate of Interest (ROI). Although, CDs offering variable ROIs have been introduced, the traditional fixed-ROI CDs are the more popular choice. At the end of the mentioned time period, you get your Principal and the accrued interest.
Why CDs For Investment?
Economic cycles tend to vary, sometimes too frequently for your comfort and it becomes difficult to seek a secure mode of investment. Even the share markets tend to undergo the usually up-and-down cyclical phases. What’s more, saving deposits don’t have very appealing interest rates either. In such a scenario, a Certificate of Deposit comes across as the most secure way of investing your money and earning assured interest rates, which in the long-term are almost at par with other lucrative market-related investment schemes.
Compared to a typical savings deposit, a CD proves more profitable, though they can’t be operated with as much flexibility. Another feature that sets apart CDs is the pre-determined denomination in which they are issued. For example, CDs could be issued by a bank in pre-defined denominations of $500, $1,000 and $5000.
Purchasing CDs: You can purchase a CD for any period of time. The usual options extend from a few months to as long as five years. It is advised to purchase CDs for longer periods of time, as this allows an earning of a substantial amount of interest. However, purchasing CDs for more than five years is seldom recommended, because a bank’s own interest rates could undergo major fluctuations and you could find yourself stuck with a low-earning CD for a very long period. Again, various banks and financial organization offer varying rates of interest, so you have to do a personal research before making your decision.
Purchasing a CD from a bank is the norm but they can also be purchased through brokerages. Some banks may have minor stipulations, such as the presence of a banking account in your name, to issued a CD. However, the trend varies across the banking sector and some institutions are liberal enough to even entertain online applications and issue CDs.
Avoiding Penalties: You can incur a Penalty Fee if you request the institution to return you the money before the fixed time period expires. Therefore, it is always recommended not to withdraw your money prematurely from a CD, unless it is absolutely unavoidable. This is the only obvious drawback with CDs, i.e. your capital is no longer liquid and you are discouraged from making withdrawals.