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Certificate of Deposit

What is a certificate of deposit?
A certificate of deposit is a financial tool that allows an investor to earn interest on their money in exchange for having to tie it up for any fixed amount of time. A certificate of deposit is an excellent investment tool for someone who does not need immediate access to their money.


What is the rate of return on a certificate of deposit?
The interest rate on certificates of deposit will vary by financial institution. The more you are willing to invest, the better rate of return you can expect to receive. In general, the interest rate on a certificate of deposit is typically better than the interest you would earn on a regular savings account or a money market account (since these types of accounts do not have minimum investment terms).

-- Investing Tip by FindLocalBanks.com
When shopping for a CD / Money Market account, make sure you compare the Annual Percentage Yields of each account. The Annual Percentage Yield (APY) is calculated by using the dividend rate of the account and takes into consideration how often interest is compounded on the account. While two insitutions may offer the same dividend rate on an account, the account that compounds interest more frequently (i.e. monthly as opposed to quarterly) will earn the customer a higher APY, and thus earn more money.

If I get a certificate of deposit, how long do you have to commit your money?
Certificates of deposit are available for many terms. The shortest committment term is typcially 3 months for a certificate of deposit. However, the longer you are willing to commit your money, the higher rate of return you can get on a certificate of deposit. Certificates of deposit are offered for 6 month, 1 year and multiple year terms.

Can you liquidate a certificate of deposit if you need your money?
Most financial institutions will charge an early withdrawl penalty if you liquidate a certificate of deposit before its maturity date. If you think you may need to access your money in the near future, select a certificate of deposit with a short term. You may also want to consider putting your money into a money market account.

-- Investing Tip by FindLocalBanks.com
When considering how to invest your money, take into account how secure the investment is. We all want to earn the most money possible, just know that some financial products can actually decline in value. For example, a certificate of deposit typically has a lower rate of return that many mutual funds, but it is guaranteed not to decline in value-while a mutual fund could decline in value. When making a decision between two financial investment products, remember to take into account how much risk you are willing to accept regarding potential loss of original investment.

Is a certificate of deposit a safe investment?
If you get a certificate of deposit from an institution that is FDIC insured, your investment in a certificate of deposit will be guaranteed by the federal government -- meaning the value of your principal investment will not decline. The FDIC typically insures accounts up to $100,000 - so you should consider investing into multiple certificates of deposit if you plan to invest more than $100,000.

Section Topics

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