A certificate of deposit, or CD, is a low-risk investment, offering smaller returns but more stability than the stock market. A CD is virtually risk-free, has a fixed term and is insured by the FDIC, or Federal Deposit Insurance Corporation, up to $250,000.
CDs are not liquid – so you will be tying up your funds for a set term, as low as one month or up to 5 years. If you do not have enough in your savings for an emergency fund, a CD may not be the right choice of investment at this time.
Investors may be subject to high penalty fees if the CD is cashed out too early which may erode any interest earned.
To purchase a CD, you must invest a fixed amount (the principle) over a predetermined time frame. With traditional CDs you are guaranteed a fixed interest rate over the life of the term. With some CD offers, you may even withdraw the interest payments as you receive them. There are many types of CDs so be sure to read the fine print for the terms and conditions.
Certificates of deposit may be purchased at banks, credit unions and some brokerage firms. Experts recommend avoiding terms longer than 5 years, as the interest rate environment is subject to change.
5 CD facts to know
- Fixed-income, more stability than the stock market
- Higher returns than MMA or Savings Accounts
- Steep penalty fees if cashed out before CD maturity
- FDIC insured up to $250,000
- Available at banks and online