A Certificate of Deposit – “CD” – is designated as an affordable and low risk investment. Someone who opts for it will be lending a sum to a bank in exchange for a compensation, while the bank concentrates the money that was raised from investors in offering loans to its customers.
In this article, we will explain Certificate of Deposit investments in more detail so that you can understand if it is an investment model that suits your portfolio and your interests, and how you can start investing in CDs.
One of the biggest appealing characteristics of investing in certificates of deposit is the possibility of estimating more precisely your future earnings rate according to the stipulated amount to be deposited, given that the bank is not allowed to change it overtime.
Therefore, it consists of a much safer way of investing compared to the stock market for example, because despite offering a fixed earnings possibility, it does not present the volatility of other types of assets.
The vast majority of banks offer this type of service as it results in benefits for them as well. It is also very accessible to the clients due to its investment process being quite similar to that of opening a savings account, for instance.
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The profitability rate of these certificates does not have a standardized fixed amount for all banks, presenting different remunerations depending on the financial institution and the term for withdrawing the deposit, for example.
For this reason, it is recommended that there be a prior analysis of more than one institution option to carry out this type of investment, so that the sevice that best meets the goals of each investor can be accurately determined.
How it works
So in return for committing their funds to a deposit for a determined period of time, the customer receives the profit from the money that was traded and borrowed by the bank during that period.
When the predetermined period comes to an end, the CD is said to have reached its maturity date and the customer can then choose whether to withdraw the sum or invest that amounted value again, determining a new time frame for deposit and subsequent withdrawal.
Balance the pros and cons
A certificate of deposit tends to be significantly more profitable than ordinary savings in the long term, in part because the investor agrees not to withdraw any of the money while it is earning interest in the bank – agreeing to face penalties if they do withdraw it earlier on.
On the other hand, this particular factor can be helpful for people who have trouble controlling themselves and don’t want to mess up reservations that already have been set for a specific destination.
How to make it
The client can start a certificate of deposit right after deciding which type of certificate they want, the time for which the money will be invested and later withdrawn, and preferably the purpose of that income.
Then, the person will need to look for a financial institution, which can be a bank, a credit union or a brokerage, that meets the criteria established beforehand and then complete the creation of the certificate by transferring the funds.