Buying A Bank Certificate Of Deposit - The Advantages And Disadvantages Of Certificate Of Deposits
In the World of Finance, A CD does not mean a compact disc; it stands for a certificate of deposit. Thus, if you manage to buy a CD through savings and loans or through banks that is worth a certain amount of money, then the bank will be paying you in return a specific interest rate for a certain time. Consequently, if you buy a thirty-month CD, you may get a 3%, which is equivalent to $5000. Although a bank might not issue CDs for less than $1000, this is not the case all the time. Usually there are no requirements for issuing CDs.
You are free to choose when to get your interest, whether annually, quarterly or monthly, or even with the maturity of the CD. Just take care that whatever your interest is, it will never be added to your original amount of the CD. This stands in open contrast to a normal savings account. Nevertheless, you can choose to be paid by check or to have your earned interest deposited in a new account.
It is preferable not to redeem your CD before the maturity date agreed upon. If you cash earlier than agreed upon, you might lose 3 to 6 months of interest payments; such a penalty is known as the “penalty for early withdrawal”.
One of the advantages of CDs is their being insured by the government (usually the FDIC program) and this is because they are certificates issued by banks. In other words, buying CDs is a risk-free investment.
Another advantage is the freedom to buy and sell your CDs just like any bond or stock, for example, through a brokerage house. By selling your CD this way, you will avoid the penalty payment.
You should also put into your consideration that CDs usually come with a minimum, mostly $5000 and they must have round numbers (multiples of 1000).
