Explain a Certificate of Deposit

Certificates of deposit provide low-risk investment opportunities.

Certificates of deposit provide low-risk investment opportunities.

Successful financial planning requires basic knowledge of the different tools available for increasing your wealth. Not to be confused with a 1990s collection of tunes, CDs are short-term investments. Commonly called by their acronym, certificates of deposit provide some benefits over other types of investments, as well as other products your bank offers, such as checking and savings accounts.


CDs are special types of deposit accounts that banks and institutions offer as low-risk investments. By investing in a CD, you deposit a fixed amount of money for a specified amount of time, getting back your original amount plus interest at the time of maturity. While many people obtain CDs from local banks, deposit brokers and brokerage firms sometimes offer these investment services to their clients. After the designated time period for your deposit investment, known as maturity, you may redeem your investment and the interest earned. Early redemption -- pulling your money out before the date of maturity -- may result in a penalty.


This low-risk, limited investment appeals to many investors who want to place cash into an account that pays more than a standard savings account without risking heavy losses. The Federal Deposit Insurance Corp., commonly called the FDIC, insures certificates of deposit issued by FDIC-insured institutions.


As with various other purchases you may make, careful consideration when purchasing your CDs will help you avoid monetary losses. If you haven’t already, formulate a financial plan to help you determine how much of your hard-earned cash to invest in CDs. Your level of risk tolerance can help you decide how much money you should place in low-risk CDs and how much you can afford to gamble with by placing in high-risk investments that may offer higher returns. Consider any penalties you may have to pay if you withdraw your money before the maturity date. While CDs normally pay more than savings accounts, losing money from early withdrawals may defeat the purpose of your investment.


A disclosure statement describes the terms of your agreement with the financial institution that supplies your certificate of deposit. Your terms may vary, depending on the agreement you enter into with your bank. Lending institutions offer a variety of interest rates, depending on the amount of your deposit and the length of time for maturity. Compare the available options you may choose from when purchasing your CDs, such as variable interest rates, monthly or semi-annually interest payments, date of maturity and FDIC backing.


About the Author

Piper Li, a professional freelance writer, began writing in 1989. Her articles appear online at Biz Mojo, Walden University and various other websites. She is the co-editor for "Kansas Women: Focus on Health." With a bachelor's degree in journalism from Mesa State, Li enjoys writing about health, horticulture and business management.

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