Exploring Your CD Options

If you are looking at different CD options, there are many factors that you will need to consider before making a decision on one. Here are a few of the things that you will need to consider when choosing a CD.

Risk vs. Reward

If you are trying to decide whether to invest in CDs or not, you will need to think about the potential reward that you can get versus the risk that you are taking. With a CD, you are taking virtually no risk. CDs are insured by the FDIC which means that you are guaranteed at least your initial investment if the financial institution that you are working with goes bankrupt. While you are not really taking any risk, you are also getting a low rate of return. The rate that you will get is going to be higher than a savings account, but it will be lower than stocks or many other financial securities. You need to look at your risk tolerance to determine whether this type of investment is appropriate for your portfolio.

Maturity Date

If you decide that CDs are something that you want to invest in, one of the most important factors to look at is the maturity date. CDs can have maturity dates from as short as a few months to as long as several years. When you invest in a CD, you have to agree to leaving the money in a CD until the maturity date. If you do not leave the money and, you will have to pay an early withdrawal penalty which will most likely eliminate any interest that you would earn. Therefore, you need to determine what your time frame is for investing and a CD that matches that. 

Call Features

Something else that you need to take into consideration is whether or not the CD as a call feature. Many CDs will have a call feature implemented into them that you will know about before you get the CD. With a call feature, the bank or financial institution can decide to call the CD and pay you at any point. This can cut your investment short and negatively impact you as an investor. Make sure that the CD you select has a call feature that you are comfortable with.

Interest Rate

One of the most important features that you should look at when selecting a CD is the interest rate. Every CD is going to have a different amount of interest that they will pay. Since the interest rate is going to be guaranteed in most cases, you want to try to find the interest rate that is the highest available in the market.

Equity Indexed

Something else to look at is whether or not the CD is equity indexed. Certain CDs are tied to financial indices in order to determine what their interest rate will be. This can increase the amount of interest that you earn with your CD.

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