Certificates Of Deposits Explained

Certificates of deposits (or the abbreviation which is CDs) are time deposits that are made with a bank or a savings and loan institution. CDs are most commonly issued by commercial banks but they can also be purchased through brokerage firms. They are short-term to medium-term investments that are FDIC insured. There is a specific maturity date on CDs that most often ranges from a period of three months to five years. They also have a specified interest rate attached to them.

Certificates of deposits (or the abbreviation which is CDs) are time deposits that are made with a bank or a savings and loan institution. CDs are most commonly issued by commercial banks but they can also be purchased through brokerage firms. They are short-term to medium-term investments that are FDIC insured. There is a specific maturity date on CDs that most often ranges from a period of three months to five years. They also have a specified interest rate attached to them. Similar to bonds, CDs can be purchased in any type of denomination.[br]

Certificates of deposits are like all other kinds of time deposits. In other words, the money in them cannot be withdrawn at random or on a whim as you could with funds in your checking account. As a customer who buys a CD you agree to lend money to the bank for a particular span of time. What you get in return is the bank pays you a predetermined rate of interest. Most banks will charge their customers a penalty if the money is withdrawn from the CD before it has had the opportunity to mature.  

If you are new to investing and/or are looking for the safest investment possible then you have found it in certificates of deposits. CDs are considered to be at the low end of the risk spectrum. On the down side they are also on the low end of the reward side as well.

Once you purchase a CD it will pay you interest in a similar manner that your savings account does. Your earnings with a CD do tend to be higher than if you went with a traditional savings account. The annual percentage yield (APY) is higher for a CD.[br]

Certificates of deposits pay more than do simple savings. When you purchase a CD the bank is doing you a favor of sorts by paying you a higher amount of interest. In turn the favor you do for them is to keep your funds in the CD for a length of time that has been previously agreed upon.  This certainty breeds trust. The money for the CD will then be used by the financial institution for other purposes. For example, they may invest it or use it to lend to other customers.

It is very easy to purchase a CD. You go into your bank and ask to buy one. In most instances all you will be required to do is to fill out a basic form with some disclosures included in it. You do not need any special paperwork or a certificate for such. The information regarding the certificate of deposits that you have purchased will appear on your statement. The banking representative will move the money from your account into the CD for you. That is all there is to it.