Certificate of Deposit Investing: Overview and Definition

A Certificate of deposit (CD) is a type of financial deposit account offered by financial institutions. CD’s are often considered “time deposits,” due to the fact that the money invested in certificates of deposits are often held for a set maturity date, which will vary depending on the individual cd’s term. A traditional certificate of deposit is considered to be a “safe investment,” and traditional CD deposits are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor, per insured bank.

This makes certificate of deposits a relatively safe investment as compared to more “high risk” investments like stocks or mutual funds. Certificate of deposits differ from traditional savings accounts by offering a set investment amount for a set time period. The rates for cds are typically higher than standard savings accounts, but most traditional cd’s do not allow the funds to be withdrawn without penalty until the CD’s maturity term is reached (whereas most savings accounts allow penalty free withdraws).

CD Rates: Certificate of Deposit Rate Information

One of the most important considerations when investing in a certificate of deposit is the interest rate. CD interest rates are sometimes closely associated with inflation, and can be a way of measuring the current economic climate.  In some situations, however, cd rates can actually be above inflation. Some financial institutions may offer higher rates to increase their cash reserves. Certificate of deposit accounts vary for each financial institution in the way interest rates are calculated and compounded.

For example, some may offer quarterly compounding of interest, while some may offer no compounding. Others may offer daily compounding. It is important to read the specific terms for the cd rates before investing to get a better picture of the interest income potential. Cds also offer the interest earnings in various ways. Some financial institutions may offer “dividends” of the interest, while some may restrict access to the CD (and the interest earnings associated with it) until it reaches maturity. To learn more about cd rates, be sure to visit our certificate of deposit rate section.

CD Lengths: What Are the Different CD Lengths?

Another important thing to consider is the cd length. Banks and financial institutions offer a variety of CD lengths when investing. Some may be as short as a 1 month CD length, while some may go as high as 10 years or more. Since many CDs place a penalty on early withdraw of funds, it is important to select a CD terms that will allow for full maturity of the interest, without the need to withdraw the funds during the maturity process. While each financial institution may offer different types of CD lengths, some of the common cd lengths are listed below:

  • 1 month CD
  • 3 month CD
  • 6 month CD
  • 9 month CD
  • 12 month (1 year) CD
  • 18 month CD
  • 24 month CD (2 years)
  • 30 month CD
  • 3 year CD
  • 4 year CD
  • 5 year CD
  • 7 year CD
  • 10 year CD

To learn more about the various types of CD lengths, as well as the advantages and disadvantages of each term, please visit our CD lengths section.

CD Types: What Are the Different CD Types?

Another important factor to consider when investing in CDs is the “type” of certificate of deposit you want to invest in. Financial institutions now offer a variety of CD types, and it is important to understand the difference of each main CD type being offered, and the advantages and disadvantages of each type. For example, some CDs may be “callable,” which means the bank has the right to call the investment. Another type is a “bump up” CD, which is a CD that allows you to increase the interest rate to a higher rate (should the financial institution increase the rate during your investment term). This is usually restricted to only 1 time.

Jumbo CDs are another type of cd, which is suited to individuals investing large sums into cd accounts. These are typically reserved for amounts of $100,000 or more. If you are unfamiliar with the different types of CDs, then please consider viewing our CD types section, to learn more about the benefits of each CD type. This way, you can make a more informed investment decision to maximize your interest earnings.

CD Terms: What Are CD Terms?

When you invest in a certificate of deposit, you should always pay close attention to the terms and conditions of the cd. Financial institutions may impose certain terms that may be favorable (or unfavorable). For example, one term that you want to pay close attention to is the withdrawal terms. This will indicate whether or not a penalty will be imposed for early withdraw of the CD’s funds, and if so, the amount of penalty. A common penalty amount is 1 month’s interest, although this varies widely.

Another important term to consider is the renewal of the CD. Some CD terms will allow for automatic renewal, and some will not. It may be advantageous to allow CD’s to automatically renew if the cd rates are high, but at other times it may be disadvantageous. The CD interest terms will also be another term to carefully consider before investing. Banks and financial institutions that offer low frequency of compounding, may have a lower interest yield compared to banks that may have a slightly lower rate, but more frequent compounding. Always compare the actual yield when viewing these terms.

Before you invest in a CD, spend some time to learn about some of the various terms you may encounter. Read about each type of CD term, and decide which terms may be best for your financial situation, and which terms you may want to avoid. Visit our CD terms section for more information.

CD Questions: Find Answers to Common Questions About Certificate of Deposits

Do you have more questions about how certificate of deposit accounts work? If so, please visit our finance section on our website. This section contains some frequently asked questions about investing in CDs. For example, do you have to pay taxes on CD investment income? How do you open or close a CD? Learn the answers to these common questions and more.