What Is a CD (Certificate of Deposit)?

When it comes to saving money, there are many investment choices. One of the most important investment opportunities to know about is the CD, or certificate of deposit, especially bank CD's. It is important to know about this opportunity since there are many investment occasions when this may represent the only reasonable choice.

Definition of a CD (Certificate of Deposit)

Let's start with the definition of a certificate of deposit.

A Certificate of Deposit is an interest bearing deposit which in contrast to a general savings account is based on a set amount of money for a set period of time with a set (ordinarily) rate of interest. Minimum deposits may vary from institution to institution but begin typically at $500.00. Time spans usually run from three months to five years.

Advantages of CD’s

  • Dependable, predictable income
  • FDIC guaranteed
  • Readily available from commercial banks
  • Interest rate better than traditional savings account
  • Fixed rate protects from declining market
  • Available in wide range of denominations

Disadvantages of CD’s

  • Less profitable than some other investments
  • Significant penalties for early withdrawal
  • Rates low when feds set low prime rates
  • May mature at poor time for reinvestment
  • Fixed rate limits income during rising market

Characteristics of a CD (Certificate of Deposit)

Rates vary corresponding to variations in a number of factors, most significantly the length of time commitment. Don’t assume that rates are higher for longer terms, though; rates vary up and down over the months involved depending on the bank’s needs.

It is also valuable to know that offerings vary widely from bank to bank. Often smaller, local banks may present better opportunities (ie. higher rates) than larger, more widely known ones. And individual banks fluctuate in need on an individual basis. The bank offering the best rates one week may not do so the next week, and vice versa.

Individual offerings may include advantageous opportunities for improving yield, too. For example, sometimes they feature the ability to add to the deposit at some time later during the investment period. If rates generally have been declining and you can add to an existing CD at the previously established rate this could amount to a valuable benefit.

Primary Value of a CD (Certificate of Deposit)

CD's (Certificates of Deposit) are especially useful for intermediate time needs and bank CD's are often the most convenient for this purpose. Often you can get more income from CD's than other short term savings options when you need to use the funds in just a few months.