We know: How to Buy a Certificate of Deposit

What's a certificate of deposit (CD)?

A CD is a special type of deposit account with a bank or thrift institution that typically offers a higher rate of interest than a regular savings account. Unlike other investments, CDs feature federal deposit insurance up to $100,000.

How do CDs work?

When you purchase a CD, you invest a fixed sum of money for a fixed period of time - six months, one year, five years, or more - and, in exchange, the issuing bank pays you interest, typically at regular intervals. When you cash in or redeem your CD, you receive the money you originally invested plus any accrued interest.

Where are CDs available?

Although, most investors have traditionally purchased CDs through local banks, many brokerage firms and independent salespeople now offer CDs. These individuals and entities - known as "deposit brokers" - can sometimes negotiate a higher rate of interest for a CD by promising to bring a certain amount of deposits to the institution. The deposit broker can then offer these "brokered CDs" to their customers.

Are the rates on CDs fixed or variable?

At one time, most CDs paid a fixed interest rate until they reached maturity. But, like many other products in today’s markets, CDs have become more complicated. Investors may now choose among variable rate CDs, long-term CDs, and CDs with other special features.
Some long-term, high-yield CDs have "call" features, meaning that the issuing bank may choose to terminate – or call – the CD after only one year or some other fixed period of time.

What are some of the questions I should ask when considering a CD?

Find Out When the CD Matures - Many investors fail to confirm the maturity dates for their CDs and are later shocked to learn that they've tied up their money for five, ten, or even twenty years.
Investigate Any Call Features - Callable CDs give the issuing bank the right to terminate-or "call"-the CD after a set period of time. But they do not give you that same right.
For Brokered CDs, Identify the Issuer - Your broker may plan to put your money in a bank or thrift where you already have other deposits and the brokered CD could push your total deposits at the institution over the $100,000 insurance limit.
Find Out How the CD Is Held - Unlike traditional bank CDs, brokered CDs are sometimes held by a group of unrelated investors and you want to confirm that your portion of the CD qualifies for up to $100,000 of FDIC coverage.
Research Any Penalties for Early Withdrawal - Be sure to find out how much you'll have to pay if you cash in your CD before maturity and whether you risk losing any portion of your principal.
Thoroughly Check Out the Broker - Deposit brokers do not have to go through any licensing or certification procedures, and no state or federal agency licenses, examines, or approves them.
Confirm the Interest Rate You'll Receive and How You'll Be Paid - You should receive a disclosure document that tells you the interest rate on your CD and whether the rate is fixed or variable.
Ask Whether the Interest Rate Ever Changes - If you're considering investing in a variable-rate CD, make sure you understand when and how the rate can change.