Certificate of Deposit [CD]
What is a CD?
A CD is very similar to a savings account except that once you make a deposit it is locked away, held until it matures. CDs are insured making them almost risk-free. CDs are insured in the same way savings accounts are by the FDIC for banks and insured by the NCUA for credit unions. CDs have fixed terms, when they mature, which can last three, six, nine, or twelve months. There are some with longer terms from one to five years. They also require a higher initial deposit than savings accounts, from as little as $500 on up to hundreds of thousands of dollars. CDs which are opened for less than 100 thousand dollars are referred to as "small CDs" and CDs that are opened with more than 100 thousand dollars are referred to as "large CDs" or "jumbo CDs". The interest rate you receive are fixed to whatever the rate was at the time you opened a CD, when the deposit was made. CDs are intended to be held until maturity, at which time the money can be withdrawn or put into another CD and allowed to grow further.
Additionally, in exchange for holding your money for the agreed upon term, banks and credit unions will usually grant higher interest rates than you can get on a regular savings account or money market account, sometimes – there are exceptions. A fixed rate is the most common type of CD, but some banks or credit unions sometimes offer CDs with a variety of variable rates which can change yearly or based on additional deposits. Some CDs are indexed to, the stock market following the ups and downs of stock indicators, the bond market, or other indicators will adjust their interest rate accordingly, but they may also require higher initial deposits.
This is a basic introduction, because there are so many types of CDs and they are sometimes only around for a short time. Also, the length of the term can change, with some terms eliminated or new ones introduced, but never will your CD change its terms before it matures. Some CDs pay interest to your account either monthly, quarterly, semi-annually or annually. The more frequently interest is paid to your account the more you can take advantage of compound interest. The best thing to do is shop around, look at both banks and credit unions, to see which offers you the best rate, lowest fee and for the term which suits your needs. CDs will not make you rich, and many do not keep up with inflation, but they are an option for investors.
To answer a question:
Q: What happens to my money once I open a CD, does it stay in the bank or does it go somewhere?
A: The bank or credit union uses your money to make loans. They lend your money out for a much higher interest rate than they pay you, 5% to 12% or more, and then pay you once the CD matures. So, no, your money does not stay put or just sit around in a bank or credit union.
