While there are numerous ways to invest, one of the best ways is through a certificate of deposit. Unlike many other investment methods, there is no real risk involved. In fact, they are actually one of the easiest investment methods for many people to understand and use, as there are no complex financial procedures to go through in order to open a CD. Despite the abbreviation CD, certificates of deposit have nothing to do with music. Think of them more as a certificate representing the current state of your investment. They are considered to be more advanced savings accounts with far more benefits.
Certificate of Deposit Explained
No financial planner or special organization is needed in order to open a certificate of deposit. Most banks, brokerages and credit unions offer some type of CD. As there are a variety of options available, each location may offer different types and levels of investment. Typically, there is a minimum deposit of $500 to get started, while others require $10,000 or more.
CDs are available as fixed rate, variable rate and expandable. Variable rates allow for potentially higher gains, while fixed rates ensure the rate never decreases. An expandable CD allows investors to continue adding to their investment throughout the CD term.
The value invested cannot be lost, nor can any money gained be lost. The financial institution offers a higher interest rate on the invested funds than a savings account offers. The rate stays the same throughout each period and will adjust to the current interest rate at the beginning of a new period if a variable rate is chosen. The investment periods last anywhere from three months to one year at a time. Investors cannot withdraw funds until a period ends without incurring a penalty fee. Liquid CDs have a much lower interest rate, but no penalty fees.
The financial institution makes a profit from the interest the money accrues while invested. Each institution invests the money differently to earn a higher yield profit. CDs can be opened for several years or a much longer term, and can be upgraded to higher interest rates as the CD earns.
Who Benefits From Using a CD?
Anyone looking for a long-term savings account benefits from opening a CD. Parents often open a certificate of deposit for their children as a way to save for college since they cannot lose anything on their investment. Individuals often benefit most from CDs as they don’t expect or require the high return that many businesses do. CDs can be used as collateral for loans, which makes them appealing to those planning to open a small business.
Benefits of CDs
The benefits of CDs are what make them so popular. Unless funds are withdrawn early, there are no penalty fees or any cost to renew the certificate. Most automatically renew without the investor doing anything. While the rate itself is lower than one might find with other types of investments, the minimum deposit is far lower, making them ideal for a wide range of people. All accrued interest is the investor’s to keep when the CD matures. Finally, a certificate of deposit is FDIC insured, so the investment is safe no matter what.