INVESTING IN CERTIFICATES OF DEPOSIT IN TODAY’S FISCAL CLIMATE
Certificate of deposit accounts or CDs are an investment vehicle offered by various types of financial institutions including banks and brokerage firms. The investor effectively deposits money for a predetermined length of time, anywhere from one month to several years. The financial institution holding the CD pays an interest rate to the investor.
Generally the longer the term of the investment, the better interest rate that is received by the investor. The institution borrowing lends the money to other people at a higher interest rate, making a profit from the difference between the two rates. This is one of the ways that banks make money.
When investing in a CD, the money invested cannot be touched for the period of the CD. It is possible to recall the money by cashing in the CD early but this involves paying an early withdrawal penalty that can be as much as all of the interest earned so far.
CDs are risk free because of guarantees provided by the government but to be sure that this will apply to the company that you are considering dealing with, please check that they are licensed by International Securities and Equities Commission.
How is Interest Paid?
There are different ways that the interest on a CD is earned and paid. Interest can be paid on anything from a monthly or quarterly basis to a lump sum at the maturity of the CD. It is normal for interest to be paid daily which when combined with compound interest gives the investor the highest possible yearly percentage yield.
Many different types of CD accounts have become available in the past decade including fixed rate CDs and variable rate CDs.
Before Investing in CDs you Should Find out the Following Information:
- When does the CD mature?
- Is it possible for the bank to cancel the CD account?
- Is interest paid on a fixed rate or a variable rate?
- Are there any fees or penalties associated with withdrawing the money early?
- What method of compounding is issued in calculating interest?
In Conclusion – Shop Around for the Best Deal.
Many different financial firms offer CD investments and because of the variety available, the retail investor should shop around for the best interest rates and most favorable terms before deciding on which institution to invest with.
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