Investing 101: Certificates of Deposit (CDs)

Certificates of deposit are a type of investment that many people like to use. A certificate of deposit, or CD, is typically easy to find and is available at most banks across the country. Here are the basics of certificates of deposit.

Basics

The basic idea behind a certificate of deposit is simple. With a certificate of deposit, you are going to deposit a certain amount of money with a bank. They are going to hold onto the money for a specific amount of time. At the end of this period, you will be able to withdraw your original investment. While the money is deposited, it earns compound interest.

Interest

With certificates of deposit, you will be earning a guaranteed rate of interest. This interest rate is going to be better than you would be able to get with a traditional savings account. This is why many people choose to invest their money into certificates of deposit when they do not need it for a certain amount of time. You can earn more money than if you simply left it in your savings account.

Insured

One of the major benefits of investing in a certificate of deposit is that your money is insured. All CDs are guaranteed by the FDIC (Federal Deposit Insurance Corporation). This means that your money is just as safe as if you had left it in a savings account at your bank. If the bank goes under, the federal government will step in to repay you. This protection is offered on amounts up to $100,000. If you have more than $100,000 to invest, you can simply open multiple CDs with different banks to make sure that all your money is protected.

Penalties

When you invest in a certificate of deposit, you need to use money that you do not have any need for in the near future. The money that you invest has to stay in the certificate of deposit until the maturation date. If you cash out the CD earlier, you will have to pay an early withdrawal penalty. This will cancel out any of the interest that you have earned on the CD and will most likely eat into your principal as well. This feature discourages many individuals from getting involved with certificates of deposit.

Types of CDs

There are many different types of CDs for you to potentially invest in. Banks offer different interest rates on their certificates of deposit. Therefore, it is important that you shop around for the best deal when looking for a CD. Banks will also offer different durations for their CD products. For example, you can get a CD that lasts for as little as three months, or you can get one that lasts as long as five years. This provides you with many different options when you are searching for the perfect place to invest your money. Make sure that you understand exactly how the CD works before putting your money into one.

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