Americans turn to invest their hard-earned money in CDs or certificate of deposits because the risk level is low. CDs have become popular due to current market volatility and ads for CDs offering attractive returns. All the CDs mark federal deposit insurance (up to $250,000), but some CDs are complex and include risk especially related to getting funds back prematurely or locking at lower interest rates.
Basics of CDs
A CD is a special kind of deposit transaction that gives high rate of interest than regular savings account. It is carried out with banks or thrift institution.
When you invest a fixed amount of cash in CD for fixed time period – 6 months, 1 year, 5 years and more, the issuing source pays interest at regular intervals. On maturity, you redeem the original amount the accumulated interest is received. If the CD is redeemed before maturity (early withdrawal) you will be charged penalty – a portion of your interest will have to be sacrificed.
A majority of people buy CDs from banks, but some investors are enticed by independent sales person or brokerage firms for higher interest. There are some deposit brokers, who work on commission for brokerage companies.
Some years ago, CDs were paid fixed interest until maturity, but today investors have to select –
- Long term CDs
- Variable rate CDs
- CDs with special features
Some of the high yield long term CDs include ‘call’ feature. It means the issuing bank can opt to call or terminate the CD after a year or later without informing the investors. For example – in case the interest rates fall, the bank may decide to call high yield CDs and if rates rise later, your CD is locked at lower interest rates.
How to pick the right CD?
Before selecting a CD, ensure that you carefully read and completely understand the terms and its disclosure statement. Ask questions and check answers with unbiased source. You could also learn about CDs on websites like www.cdratesprophet.com
Tips to pick right CD
- Figure out your financial goals as well as risk tolerance (inflation can outpace your returns overtime).w
- Confirm the maturity date written on the certificate
- Check for any call features because the facility to padlock high interest rate for prolonged period is constrained with callable CD.
- Check the rate of interest you will obtain, how often (monthly or yearly) and how will you be paid (by electronic transfer or check).
- If you decide to invest in variable rate CD, understand how the rate structure changes according to pre-set schedule.
- Check the amount of penalties to be paid for early withdrawal.
Tips to evaluate brokered CD
- Check the deposit brokers background and history of their affiliated investment professionals using FINRA’s and SEC’s online databases.
- Federal deposit insurance limit is $250,000, therefore indentify where your deposit broker plans to purchase the CD. Your risk may not be insured fully, if the broker pushes your total deposit amount over $250,000.
- Sometimes, brokered CDs are held by unrelated investors group, so confirm how your CD is held and attain a copy of exact CD title owner.
- Ask if you are a sole CD owner or is it shared because in case you want an early withdrawals the broker has to sell your share (in case there is reduction of interest you will have to let go your share at discount and lose some original deposit amount).
Adrienne Boyd is a reputed CD broker, who has been giving sound investment advice to help her clients get better returns. You can learn more about how CD rates works by visiting her website, www.cdratesprophet.com