Certificates of Deposits (CDs) are typically low risk investments that can be easily converted into cash. It is a special bank deposit with a high rate of interest than a regular savings account. When you purchase a CD, like any other investment plan, you invest a certain fixed sum of money for a stipulated time period ranging from six months to five years or more. The issuing bank pays you interest on this sum at regular intervals. Upon maturity of your CD, you will get back your principal amount as well as your accumulated interest if any. However, if you redeem your CD before the maturity date, you will have to pay a penalty or forfeit a portion of the interest.
Besides local banks, now even brokerage firms and independent salespersons now offer CDs to investors looking for safer investments. These are known as 'deposit brokers'. On occasion, these brokers will negotiate a higher rate of interest for a CD by promising to bring a certain amount of deposit to the institution. These brokered CDs are then offered to the customers. In such an event ensure that you are getting the best certificate of deposit.
With the market growing exponentially, today, besides the conventional fixed CDs, there are also variable rate CDS that fluctuate with the market index, long term CDS and others with special feature CDs that investors can choose from.
When choosing a CD, one must consider the interest rate climate. If the rates are low, go for a shorter term so as not to tie up your money in the event interest rates rise. On the other hand go for a longer term by locking in the highest rate on certificate of deposit for as long as possible.
Some long-term, high-yield CDs have special "call" features. This gives the issuing bank the power to terminate - or call - the CD after a stipulated period of time. For example, a bank might decide to call its high-yield CDs if interest rates fall. But if you've invested in a long-term CD and interest rates subsequently rise, you'll be locked in at the lower rate.
When purchasing a CD it is essential to thoroughly understand all the terms and conditions offered. Read the disclosure statements and any fine print. Ask questions and clear all doubts before you invest in a CD. Below are some guidelines to help you make an informed decision:
Before you buy your CD, ensure the maturity date so as to not to have your money unduly locked for a long period of time. Also research any penalties for early withdrawal, how much, if at all you might have to forfeit in terms of interest or principal. Also, confirm the interest rate you will be paid and what interval you are likely to be paid. If you're considering investing in a variable-rate CD, make sure you understand when and how the rate can change. Some rates change according to a pre-determined schedule, while others depend on the performance of the market.
Check out call features if any. The right to call or terminate a CD lies only with the bank and not with you. If the interest rates fall, the bank might call the CD in which case ensure that you have received your principal and all accumulated interest. Since you do not have the option to terminate the CD, in the event the rates rise, you will be stuck with the long term CD with the lower interest rate. Redeeming this CD and getting out will also be difficult as you will now be forced to sell your CD at a discount.
Understanding some of the terms like "federally insured one-year non-callable". In a common misconception one tends to assume that this CD matures in one year. In fact it has nothing to do with the maturity date, only that the bank cannot redeem the CD in the first year.
If your CD is brokered, ensure who the issuer is before you invest, because insurance is limited to a total aggregate amount of $100,000 for each depositor in each bank. If your broker puts your deposit in a bank that already has some of your deposits, you risk not being fully insured if your deposits extends beyond the $100,000 insurance limit.
Brokered CDs are often held by a group of unrelated investors where each one owns only a small part. Confirm with your broker how your CD is held and ask for the exact title of the CD. Also ensure that the records reflect that the broker is merely acting as an agent for you. This will guarantee that your portion of the CD qualifies for up to $100,000 of FDIC coverage.
Check out the broker, his reputation and whether he has a history of fraud. This is more important as deposit brokers do not have to go through any licensing or certification procedures and are not subject to approval or examination by any state or federal agency.
CD is one investment that allows you to balance your risk and maximize your returns through laddering your CDs. You can do this by buying several CDs at one time but with different maturity dates from one to five years or more. Every year one of your CDs will mature and you can roll it over into a new CD with a longer term and higher rates. CD laddering is not only a sure means to protect you from fluctuating interest rates but also affords you the option of accessing some of your money in a short period of time.
William Brister
[http://www.moneyproguide.com] At moneyproguide.com we give you a comprehensive overview on financial planning strategies and the best plans for investing.
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