A Certificate of Deposit, more commonly referred to simply as a CD, is a stable and virtually risk free method of investing or saving money over a set period of time. The CD market offers investors a simple method of generating a profit and because the principle sum you invest is almost always FDIC insured, you do not stand to lose any of that sum unless you cash out very early on in the term.

What Is A Certificate Of Deposit?

A CD is similar to a bond – it is essentially a promissory note that is issued by a bank. Investors purchase a certificate for a given period of time and are offered a fixed annual interest rate. There is a good deal of flexibility available in the CD market with terms lasting from one month up to five years. The investor is also offered a choice of purchasing a small CD with a value of up to $100,000 or a jumbo CD of $100,000 or more.

Better Rates Than The Money Market

Because you are expected to hold your CD until the term of the certificate you should access rates that are more preferable than those of a liquid savings account. It is possible to withdraw your investment early, but there may be a substantial loss in the interest you have earned when you do sell. Before deciding on a term and value for any CD you should consider that for longer term certificates you will only receive the interest you have accrued, at the end of the term. You will, however, be required to make any necessary tax payments against the value of the annual interest every year.

Missing Out On Increased CD Rates

CD rates offered by the banks change regularly according to market conditions. This means that a CD may offer what looks a favorable interest rate now, but that interest rate may not look so good mid-term. There are methods of avoiding some of this disappointment – a bump-up CD usually enables you to bump up to a higher interest rate once during the term of the certificate. The price for a bump-up CD is that you receive a lower starting interest rate than is offered on a similar term, standard certificate for the same investment level.

Laddering Your Investment

Another method of avoiding missing out on an improved CD market is using an investment technique known as laddering. Rather than placing your entire principle sum in a single CD, laddering means purchasing CDs of varying lengths so that they come to term every three months, six months, or every year. As each rung of the CD ladder matures, you then reinvest the capital so that it makes up the longest term in your ladder, and so you continue to invest, and continue to reap the interest on a regular basis.

Getting Better Rates

A longer term CD offers the better interest rates. Similarly, the more you invest in a single CD the higher the interest rates are likely to be. By using an online bank rather than a high street branch you should be offered better rates. This is because the overheads of running a bank, or any business, over the Internet, are considerably lower. Do shop around for the best deals but always ensure that you are comfortable with your final choice. As well as standard Certificates of Deposit there are a number of specialist types.

Rolling Over Your Investment Capital

Once a CD reaches term, you will receive the interest that you have earned over that term. You can, of course, choose to take the capital as well, at that point. Most CD banks offer their certificates so that the initial capital can be rolled over for the same term at the current rates on fruition of the original agreement. This prevents you from having to manage your CD portfolio on such a close basis.

Is A CD Right For You?

A CD offers improved rates over the money market and in exchange you let the bank hold your money for a specific period of time. The capital you initially invest is FDIC insured but penalties are imposed for those that cash out early. If you hold a CD for the majority of the term then you will lose a percentage of the interest you have earned so far but none of the investment capital. In contrast, with some CDs, if you cash out very early on you may lose some of the interest that you have yet to earn, meaning that it will take a little of your initial capital away. The moral of the story? Only invest money you can live without over that period of time.

No user commented in " CD Investment Basics "

Follow-up comment rss or Leave a Trackback

Leave A Reply

 Username (*required)

 Email Address (*private)

 Website (*optional)