All CDs Are Not Created Equal

A certificate of deposit (CD) is a short-term, low-risk product offered by banks and brokers. However, where you purchase the CD will determine just how risky it can be. A CD is a time deposit. You deposit the entire amount up front and collect the principal plus interest at maturity. Several maturities are offered, typically between three months and five years.

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The rates offered on CDs are usually higher than rates offered on savings and money market accounts (from the same bank or broker) to compensate for the commitment of funds.

When you are ready to invest, you can go to a bank or to a broker to buy a CD. Here’s some background on each product.

Buying from the bank – Bank CDs are considered bank products, and there is usually no fee to purchase one. As bank products, bank CDs are protected by the Federal Deposit Insurance Corporation (FDIC).

Early withdrawals are subject to a penalty, so be careful about placing money into a bank CD if you may need the money before the CD matures.

Buying brokered CDs - When buying CDs from a broker, you have access to as many rates from as many banks as the broker can find. For the increased access, you will probably be subject to commissions. There also may be a minimum investment amount, typically the amount is $10,000.

Some brokered CDs are considered to be securities and not bank products. If a CD is considered a security, then it is not FDIC-insured.

There is a secondary market for brokered CDs. So, if you wanted to get out of the CD before its maturity, then you could sell it to someone else. However, there is risk that no one will want your CD as well as risk that the CD may not be worth as much now as it was when you bought it. The value is subject to market conditions, which are subject to change.

Before you buy any CDs, here are a few questions to ask:

What is the annual percentage yield (APY)? When does the CD mature? What, if any, is the early withdrawal fee? Is the rate fixed or variable?

For more information on CDs, visit FINRA’s Bank Products page.