How Does a Certificate of Deposit Work

Garv breaks down Certificate of Deposits or CDs, learn why it might not be a good investment for your money.  CD's are fixed in term and are issued with a term to maturity as small as 3 months and range well past 5 years.  They provide the investor with fixed rates of return which typically track the rate of inflation.  CDs are generally offered by credit unions, banks, and thrift institutions.  In some cases, brokerage houses can also offer a certificate of deposit if they are affiliated with a bank.

CDs are insured by the FDIC (federal deposit insurance corporation) or the National credit union association.  The FDIC will insure CDs issued by member banks which are not credit unions.  NCUA will provide insurance on issuances from credit unions.  The FDIC will insure only up to $250,000 per CD per bank.  Therefore, investors should diversify their CDs at different FDIC insured banks.

We can make a few generalization around CD interest rates.  First, larger deposits get higher interest rates.  Longer dated CDs also get higher rates in most cases since the investor is taking more risk by lending their money for a longer period of time.  Usually smaller institutions can provide higher interest rates than larger institutions.  It is also common for personal CDs to receive higher interest rates than business CDs as business CDs are usually not as long in term as personal ones. 

CDs will come with a minimum deposit requirement and are to be held for a fixed term until maturity.  An early withdrawal can result in a penalty equal to the interest earned.

The speaker personally avoids investing in CDs as you earn a negative rate of return due to the fact that the interest rates are tracking the rate of inflation.  Essentially, you are not making money.  CDs are most typically utilized by very risk averse investors.


Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...

Tradingsim.com
Day Trading Simulator

Tradingsim.com provides the ability to simulate day trading 24 hours a day from anywhere in the world. TradingSim provides tick by tick data for...

Send this article to a friend.

Enter multiple addresses on separate lines or separate them with commas.