Certificate of Deposits (CDs) can be categorized into low risk investment which sold by banks, thrift institutions, and credit unions. Many people are interested in this investment since several banks offer higher rate of interests. Yet, the maximum amount is insured up to $250,000 for every single account. It has a fixed term range from monthly, three month, six month, or to one till five years and a fixed interest rate.
Therefore, the aim of this investment is that the investors have to hold their money in bank or any credit union until the maturity so they can withdraw their money together with the accruing interest. Usually, banks offer higher interest rate for personal account rather than business account.
Since the coverage limit for each account is only $250,000, an investor may invest in his/her money in several banks or thrift institutions. Laddering CDs is another way to maximize the return by buying several CDs at one time with different maturity dates. When one CD reaches its maturity, depositor can close it and open a new CD with long term and higher interest rate. By doing this, it can help the investor to avoid fluctuating interest.
However, since CD is a deposit account which has rate of interest and the time frame marking the duration of one account, early withdrawal is one thing that investors should be aware of. During that particular term agreed-upon by the investor and the CD issuer, the money is locked away. Any violence such as early withdrawal may give some consequences to the investors. Some banks and thrift institutions will give penalty, for instance paying penalty fees or forfeit a portion of the interest earned.
In addition to that, before opening a deposit account, investor is supposed to know and understand about the term and condition of the CD. It includes when the maturity date, how much interest rate and how the investor will be paid. The changing of the interest rate is also important to know whether the interest rate may increase or decrease under a particular condition. Furthermore, an investor should know if there is any callable CD feature in the issuing bank.
The last thing is how much penalty fee that should be paid if there is any early withdrawal.
Most investors consider CDs as a safe investment which has higher interest than other insured investments such as checking and saving account. Although the rates may vary from one CD to other CDs, generally the interest rates are close to current rate of inflation.
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.