A Certificate of deposit (CD) is a low risk and safe investment plan. Typically, a CD is an insured time deposit under Federal Deposit Insurance Corporation (FDIC) issued by banks or brokerage firms. There are various kinds of different CD’s as opposed to just the the traditional ones, such as Step Rate CD, Rising Rate CD, Market Index and Expandable CD.It is easy to open a CD as it requires any amount as little as $500. It carries a fixed rate of interest and the higher the amount deposited, the higher the return rate. Moreover, the longer the repayment period one chooses, the higher the return rate. A CD is also available in short or long terms needs for the more short-term customer.
CDs have several benefits. One being safety, as it is insured under the FDIC policies in banks, brokerage firms, savings & loans firms and other lending institutions. CDs come in a wide selection due to the different types and terms to cater for all the long-term or short term goals of investors. A CD enables principal reinvestment as dividends and interests paid by the CD can be reinvested into other accounts and funds owned in the institution.
The market also offers an increase in savings with promotional CD rates. Even though the promotional CD rates are offered for a limited period they tend to earn good interest.
To get the most from a CD, assess your need. It is important to understand exactly what your investments requirements are. On the other hand, match the personal finance situation with the liquidity needs. Set your time frame and determine how long you can set the principal apart. Commit to a longer CD if you can part with the money for a longer time or a shorter CD if money is needed sooner.
Another important insight on CD is called “building a ladder’. This is basically setting up several CDs with different maturities. This strategy helps one to take advantage of the higher rates with longer maturities, while at the same time retaining the flexibility for some of the money to mature faster. Moreover, laddering will help one to reinvest the money from the short-term accounts at the probable higher rates.
Shop around for the CD rates from the different banks or brokers. Usually, A CD from the bank makes one want to get out of the CD early, however the bank charges for this as a part of the interest. However, if a CD is from a broker, it can be sold at any time. This comes without a penalty and it depends on what the market pays.
Some CDs come with conditional rates while others are callable, whereby those banks can terminate them early. As a customer, ask for automatic renewals and inquire about the rate at which a particular CD will mature.
CD rates do not have the growth prospective of stocks, but they are a solid way to keep your money growing with a number of flexible options depending on your needs. Always do your homework and know the pros and cons of the different financial institutions in your area. It will serve you well to know who you are investing with and all the details of how your money will be cared for.