What Are Certificates of Deposits?

by Whitney Arana

Overview

What Are Certificates of Deposits?

A certificate of deposit (CD) is an investment in which a customer gives money to a bank for a set period of time in exchange for a high interest rate.
Benefits

An FDIC-insured CD means a guaranteed return on an investment. Because a fixed interest rate is agreed upon at the start, the customer can accurately count future earnings.

Disadvantages

The money invested into a CD is unavailable to the holder until the date of maturity (the expiration date). If the holder wants to withdraw money from the CD before the date of maturity, a penalty fee will be charged.
Term

Certificates of Deposit are short- to medium-term investments. Specific terms range from one month to several years. The longer the maturity, the higher the interest rate.
Types

A CD for under $100,000 is called a "small CD." Over that amount means getting "jumbo CD." The latter is much more risky because the FDIC can only insure CDs up to $100,000, so, if the bank is unable to return the investor's money, the investor has little chance of getting it back.
Maturity

After the maturity date, the holder has about two weeks to decide whether to reinvest into a new CD or take the money back. Sometime banks automatically reinvest without warning the customer, so it's important not to forget the maturity date and just expect a reminder from the bank.