Not referring to the classic Bon Jovi disc lying on the car seat, CDs refer to a type of financial investment. Standing for ‘Certificate of Deposit’, CDs are like an investment in which is very low risk. Comparable to a savings account, CDs are deposits that grow and make money over time.
CDs are issued by various financial institutions, including banks, a company’s credit union, or a Savings and Loan Institution. A savings account is a very secure low risk way to accrue, or slowly receive interest on return for depositing an unlimited amount. On the contrary, a fixed amount is deposited into a CD account and like a savings account accrues interest, but at a higher rate. CDs can be classified as an investment that is not as low risk as a standard savings account, but less riskier than stock.
It is most recommendable to keep your money for the fixed time period, unless the investor is willing to pay the consequence. Investors choose anywhere from 3 months up to 5 years to keep the amount in an account (the higher the amount invested, the higher the interest rate) until it has reached maturity. At this time, the investor can withdraw the new amount.
Money withdrawn ahead of the matured time will face penalty. These penalties depend on the specific financial institution’s policy. One example: the institution will take back interest earned in the past few months, which is essentially a fine for having withdrawn. It is less suggested to pull out money ahead of time, but consumers sometimes find themselves in a dire need for fast cash.
Carefully review interest rates (always compounded) and penalty fees from various institutions before making the pick. Also, it is a huge advantage to buy into more than one CD account with different periods. Then, once the shortest period fund matures, it can be invested into a longer period fund to increase returns; this ladder effect is part of many diversified investing strategies used.