What is a Certificate of Deposit?

A certificate of deposit, also known as CD, is a promissory note issued by the bank for “lending” them your money in what is called as a “time deposit”. It has a fixed maturity date and interest rate. Also, it cannot be withdrawn within a certain period – one month, three months, 1 year, or 5 years.

Withdrawing the deposit before the maturity usually incurs a penalty, which is often higher than the interest that could have been earned upon maturity. Therefore, once a depositor decides to put his or her money for a time deposit, keeping it there until the maturity date must be thought of first.

What are the advantages of CD?

One advantage of placing money inside a bank for a certificate of deposit is the fact that it is a safer investment compared to stocks, bonds, and other types of volatile investments because the Federal Deposit Insurance Corporation (FDIC) insures CDs up to $250,000. Other advantages of CD are the following:

  • CDs aren’t only safer investments. They also earn higher interest rates compared to money-market savings and checking accounts.
  • Choosing the bank that gives higher interest rates is also possible. One tip is to deposit to smaller banks as they give higher interest simply because they need the depositors’ money for their business operations.

What are the Disadvantages of CDs?

If CDs have advantages, it comes with not-so-beneficial terms such as:

  • The money placed in a bank for a time deposit is tied up or becomes idle (on your end) within a certain period. This simply means that the depositor can’t or has a limited capability (unless he or she has a lot of resources) to invest in an opportunity if in case it arises before the maturity of the deposit.
  • Even with inflation, CDs interest don’t pay well compared to investing in stocks or bonds (although the latter is risky). Stocks can cope up with inflation, but CDs can’t.

 

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