Summary List Placement
A certificate of deposit (better known as a CD) is a financial product that allows you to earn interest on your money at a fixed rate without the risks inherent in investing.
To use a CD, simply deposit a certain amount into the CD account. Your money will then grow at a set interest rate for a set term.
You run the risk of paying early withdrawal fees if you need to take cash out of your CD before it matures, so make sure any money you deposit is cash you won’t need in the short term.
See Business Insider’s picks for the best CDs »
Although investing in the stock market can be a great way to earn money in the long run, some people want a less risky place to put their money.
One option is the certificate of deposit, better known as a CD, with its promises of risk-free growth and flexible term lengths. But without an understanding of exactly what a CD is and how it works, it’s possible to get burned by early withdrawal fees.
So how do you know if a CD is right for you? Or how to pick the right one? Whether you need a refresher course or a full-on deep dive, let’s untangle all your most pressing CD-related questions.
What is a CD?
First, the basics — CD is shorthand for certificate of deposit, a financial product that’s sold to consumers by institutions like banks or credit unions.
Typically insured by the Federal Deposit Insurance Corporation (FDIC) for banks and by the National Credit Union Administration (NCUA) for credit unions, the CD is a risk-free savings product that allows you to grow your deposit at a fixed rate for a fixed term.
In its simplest terms, a CD is basically a savings account but with two major differences. While checking and savings accounts can be withdrawn from at any time, a CD is an account with a specific maturity date. And while a savings account’s rate can change at any time, your CD rate is locked in until the term ends.
How do CDs work?
When you open a CD, you’re essentially promising your financial institution access to your money for a set term. (These terms can be as short as 21 days or as long as 10 years, but the most common ones you’ll see range from one to five years.) Your bank likes this because during that time, it can earn interest on your funds by extending them as loans to other account holders.
To incentivize this act of trust on your part, the financial institution insures your funds and guarantees a certain amount of growth, as dictated by your interest rate. These rates tend to be slightly higher than typical savings account rates, and often rise even further when you increase factors like term length and the size of your deposit.
No matter what the market does in the meantime — and whether interest rates fall or rise, …read more
Source:: Business Insider