What Is a Certificate of Deposit?

A certificate of deposit is a savings instrument similar to savings accounts, stocks and bonds and is usually available from any bank or credit union. They differ from savings accounts in that a lump sum of money is deposited into the certificate, also called a CD, and the money is held in the account collecting interest. CDs have different interest rates and terms, or length of time the money must stay in the CD to collect interest. Deposit and withdrawals are usually locked for the entire life of the CD, with the owner of the CD barred from adding or removing funds from the CD for the term of the instrument.

CDs are generally offered in several different terms and interest rates. Most are available in terms ranging from a few months to several years. Normally the higher the interest rate available, the longer the money must stay in the CD. One of the main differences between CDs and other money investing techniques is all the money in the CD is returned to the depositor when the term of the CD is completed. Unlike stocks or bonds, which can gain or lose money, CDs collect interest and are not invested in any other instruments.

Certificates of deposit are available from any bank or credit union and different institutions will have different options to choose from. A smart CD shopper should always shop for the best rate and a term that agrees with their investment style. Those looking to invest in CDs should always be aware of any penalties for early withdrawal of funds and have a plan on what to do with the money when the term of the CD is over. Most investors role over the money in a CD, once the term is met, into another CD with a higher rate. The interest earned on a CD can be paid to the depositor as soon as it is earned on the money deposited, or it can be rolled into the principle of the CD. All the funds, including interest, can be rolled into a new CD once the investment term is completed.

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