Certificates of Deposit: The BasicsA. Bohart
December 17, 2008 — 1,266 views
With the recent turmoil in the stock market, many folks are looking for alternative ways to invest their hard-earned money. Certificate of deposits (CDs) are a great way to do this in a relatively risk-free way, and many financial advisors suggest using one of these instead of a traditional savings account. Certificates of deposits (CDs) can be purchased from a brokerage firm, credit union, bank, or savings and loan institution. When you purchase a CD you agree to leave a set amount of money in the account for a set period of time. In return, the financial institution guarantees you a set amount of interest on that money. When the CD matures you then get your initial money back plus a small profit from the interest earned. The following is some basic information about CDs and some guidelines for choosing the right investment.
For most people the key factor in deciding on the right CD is the minimum deposit required to open the account. CD accounts generally pay more interest than a traditional savings account. In order to do this, the banks will require you to deposit some minimum amount of money for a set period of time. This deposit requirement will vary from institution to institution and can range from a few hundred dollars to tens of thousands of dollars. You will have to do some shopping around to find the CD that is right for you in terms of the amount required to open the CD.
The maturity period is another factor that you will want to consider when you choose a CD to invest in. This refers to the minimum amount of time the money must be kept in the CD account to get the full return. Most CD maturity periods range from 1 month up to about 48 months. Some banks offer flexible maturity lengths, with differing amounts of interest available depending on how long you are willing to keep the money tied up in the CD account. In general terms, the longer you keep the money in the account, the higher the interest rate the bank will be willing to pay. Other things to consider here are the compounding rate and early withdrawal fees that might have to be paid should you need to take the money out for an emergency expense.
For those investors looking for a safe and stable place to grow their money, Certificates of deposit offer a great alternative to the wild and wooly stock market. CDs offer a guaranteed return on investment, and can be set up in such a manner as to provide maximum returns. The investor should be aware, however, that returns are likely to be lower than long term approaches to the stock market. As with all investments, the risk assumed is directly proportional to the potential return on the investment. CDs are very low risk, so the return is minimal in comparison.