Tips for Investing in CDs

Investing in CDs is a great way to get your feet wet in the world in investing because they are low risk. They are great for preserving your cash and minimizing the affects of inflation. That doesn’t mean CDs are without risk. When investing in CDs make sure you read the fine print and have a full understanding of what type of CD it is. Below we go over some tips for investing in CDs.

Know How CDs Work

When you purchase a certificate of deposit (CD) you are lending a fixed amount of money to a financial institution for a specific amount of time. In exchange, the bank agrees to pay you interest on the CD. When the term is up you can cash in the CD and get your money back in addition to any accrued interest. You can redeem your CD before it matures, but you will likely be issued an early withdrawal penalty. CDs are FDIC insured to the money and interest earned are protected up to $250,000.

There are Different Types of CDs

The most common CD is a fixed-rate or traditional CD. These pay a fixed rate of interest for a specific amount of time. However, more financial institutions are beginning to offer various types of CDs in order to entice investors. Many banks now offer a portfolio of CDs that have non-traditional features. For example, many banks are now offering liquid CDs with no early withdrawal penalty similar to a money market account. There are also certificates of deposit out there with variable interest rates that are set to change at different intervals so that investors can take advantage if interest rates go higher. These variable CDs are set to a fixed schedule or are tied to indexes such as the S&P 500or Dow Jones.

Opening a CD Account at a Bank

The most common way to invest in a CD is to open up an account at a bank. The CD is offered directly to you from the bank. You are responsible for knowing the terms after the banker goes over the details with you. You will want to make sure you understand all terms including whether the CD is FDIC insured.

Brokered CDs

Brokered CDs are offered through brokerage houses or agencies and are typically co-mingled accounts of several investors. CD investors with several thousands of dollars to invest in CDs may choose to invest funds through a broker at multiple banks, thus utilizing the FDIC insurance coverage at multiple locations to further mitigate risk. Also, brokers who invest large sums of money may be able to get higher interest rates because of the large amount of money to be invested. Before investing in a CD with a broker, make sure they are a legitimate broker as FDIC insurance does not cover fraudulent acts made by the broker or brokerage firm.

When investing in a CD, ensure that the deposit is FDIC insured. Never take the broker’s word for it. Not all banks are insured by the FDIC. You can check the FDIC’s website to find an updated list of insured financial institutions.

You also want to make sure the CD’s principal (original investment amount) is not subject to contractual risk. An investment is a CD only when the issuing bank agrees to give back the full original amount investment once the CD matures. If there are contractual contingencies on the principal then the “CD” is not really a CD and is not insured by the FDIC. Make sure you understand these stipulations as well as double checking the maturity date of the CD.

Should I Invest in CDs for Retirement?

Investors wanting to grow their retirement portfolios often turn to certificate of deposits as investment vehicles. But is this a smart move? CDs have been around for years and are a popular investment vehicle, but they are not for everyone. Let’s discuss whether or not they are good retirement investments.

 

What exactly is a CD?

A certificate of deposit is typically purchased directly from a bank, but can also be offered through a brokerage. Bank CDs are known as traditional CDs. CDs offered through a brokerage are known as brokered CDs. When you purchase a CD you agree to invest your money for a specific period of time and the bank agrees to pay out a specific rate of interest. At the end of the term you get your original investment back plus the interest. Depending on what type of CD it is, you will be charged an early withdrawal penalty if you withdraw a portion or all of your money out before the CD matures. A brokered CD can be sold before the maturity date.

Risks of Certificates of Deposit

There are two main risks when investing in CDs: Inflation and lack of liquidity. If you are going to need your cash fairly soon, then choose a short-term CD or another investment vehicle altogether. Once you invest in a CD your money is tied up for the duration of the term. People who want a safe investment, but need liquidity should consider a money market account.

The other downside of CDs is the low rate of return. Sure they are a low-risk investment, but often times the rate of return does not even keep up with inflation. That means you are actually losing money. Let’s say you invest in a long-term CD while market rates rise, you are actually losing money. To avoid this hazard, investment experts recommend laddering your CDs by investing in multiple CDs with different maturity dates and then reinvesting the funds in higher rate CDs.

Investing in CDs for Retirement

There are two different kinds of investments: Wealth building investments and wealth preserving investments. CDs definitely fall into the wealth preserving category. So investing in CDs for retirement really depends on what your goals are.

A young person who has several years of work before retirement will want to build wealth by investing in higher risk/higher return investments like stocks. Stocks have been proven to be the best long-term wealth building vehicle for young investors to build retirement. That means they will want to avoid CDs for the most part. A young investor may want to park some cash in a CD for a short period of time and use it as a temporary savings account for a down payment on a house.

Older investors who are close to retirement or have already retired may want to use CDs to mitigate risk and preserve their existing wealth. If you are close to retirement then it isn’t a bad idea to adjust your investment portfolio and move funds from higher risk vehicles to CDs. Remember, CDs are FDIC insured so even if the bank goes under your investment is still protected.

The Final Word on CDs for Retirement

For most retirement investors, CDs are not the answer to building a secure future because the returns are so low. Other investment vehicles offering a greater return are a better option. CDs protect capital, but they are certainly not income generating investments. If you keep this in mind you will know when a CD may be an appropriate investment choice. Should you have questions you should speak to an investment expert or financial planner.

Money Market vs. Certificate of Deposit

Money market accounts and CDs are known as low risk, low reward investment vehicles that are great for parking cash to be used in a short period of time or as a place to put money while deciding where to invest it. But which is better? Let’s take a close look at money market accounts and certificates of deposit and see how they compare.

Certificate of Deposit (CD) Overview

CDs are debt instruments issued by financial institutions such as banks and brokerages to individuals. When you invest in a CD you are basically agreeing to lend your money to the financial institution in return for a fixed amount of interest. CD rates vary and are typically low. CD maturity dates range from just a few weeks to several years. The longer you invest the higher the rate. Most CDs have early withdrawal penalties should you want or need to pull your money out before the term is complete.

Pros: CDs are very low risk. They are FDIC insured, which means if the bank goes belly up your funds are protected. As an investor you also know what the rate of return will be. CDs are great wealth preserves rather than wealth creators. They are great for retirees who want to protect their existing wealth. They are also a great place to park some cash that you will need in the near future for a down payment on a house or college tuition.

Cons: CD rates are often low. In fact, many of the rates in today’s economy do not even keep pace with inflation. Plus, you do not have access to your money until the CD matures. In the case of an emergency, you would have to use other funds or take a substantial penalty for withdrawing money from your CD early.

Money Markets Overview

Money market accounts offer many of the same benefits of certificates of deposit, but are very liquid. In other words, you can draw money from the account because of the check-writing privileges. A money market account is basically a type of low risk mutual fund where fund managers invest in government t-bills, savings bonds, CDs and other safe investments. The income earned is then paid out to the money market account holder.

Money market accounts are easy to open and available through most banks. You will typically receive a check book to use when you open the account.

Pros: Opening an account is easy. Depositing your money in a money market account is as easy as putting money into your checking or savings account. The cash is then immediately available for you to use as you see fit.

Cons: The rate of return is typically low, just like CDs. You also have limited check writing privileges in most cases. Also, money markets typically yield a higher return for more wealthy investors who can invest more money.

The Decision

Money market accounts are generally considered the superior option to preserve wealth and to park cash in between investments.  The liquidity aspect favors the money markets because you have access to your cash when you need it. Also, the interest rates are very comparable so why not go with a money market account that keeps you in a liquid position rather than tying up your money.

When selecting a money market account make sure you check around for the best rates. It should also be noted that money market accounts are different than money market funds. Money market funds pay a higher rate of return but are not insured by the FDIC where as money market accounts are.

Are CDs Still a Good Investment?

Investors looking to grow their money want to know if CDs are still a good investment in 2012. Well, that depends on what you mean by “good investment.” It’s all relative. It really depends on what your investment goals are. If you’re looking to strike it rich with a minimal investment then CDs are not for you. But if you want a safe place to park your money and keep up with inflation then you may want to consider a CD.

There are several types of CDs. Let’s first take a look at what they are and then discuss if they are a good investment or not.

CD stands for certificate of deposit. They are low risk low return investments. You agree to purchase a CD for an existing period of time and the bank then agrees to pay you interest provided you leave the money in the CD for the entire term. CDs are among the safest investments a person can make because you are guaranteed to get your money back in addition to the interest once the CD matures. They are FDIC insured up to $250,000 so even if the bank goes under you are fine.

Traditional CD – You get a fixed interest rate for putting your money in a CD for a specific period of time. When the CD matures you can take your money and interest or roll it into another CD or investment vehicle. Withdrawing the money early will result in a penalty.

Liquid CD – One of the knocks against CDs is they are not liquid. A liquid CD allows an investor to make withdraws without penalty. The interest rate is slightly lower, but still higher than a money market account in most cases.

Zero-coupon CD – This type of CD reinvests the interest instead of paying it out. The result is a higher interest rate.

Callable CD – These CDs can be recalled by the bank after a specific period. A bank may do this if the interest rate falls well below the initial rate. These types of CDs generally have higher interest rates and are offered through brokerages.

The downside of CDs has always been the low interest rate. If the Federal Reserve keeps rates low then the interest rates will stay low. Most of the time CD rates do not even keep up with inflation. CDs also tie up your money. So if you know you are going to need your cash soon then investing in a CD is probably not for you.

High yield CDs are the ones that take the longest to mature. And if the economy improves the Federal Reserve will raise the rates and you can make an even better return that beats inflation. If you have enough money to invest in CDs, at least $5,000, the best way is to ladder them. For example, you invest $1,000 in a one-year, $1,000 in a two-year, and so on until you get to the five-year CD. If you don’t want to invest by laddering you can find a CD that allows you to raise the rate if interest rates go up.

CDs aren’t for everyone. If you have a lengthy investment window and want a bigger return then you should consider a mutual fund. If you want liquidity yet still want to earn interest at a higher rate than a savings account, then a money market account is a good choice. CDs are great for parking your money in a safe investment vehicle and if you choose the right ones you can beat inflation. They are a great way to diversify your portfolio along with higher risk/higher return investments.

Introducing Negotiable Certificate Of Deposit

Most of the negotiable certificate of deposit is high yield certificate of deposit. It has a short maturity term. The term of maturity can be few weeks to about 1 year, but not more than one year. Certificates of deposit, which are negotiable, are sold in secondary market because it reaps huge benefits. Significant amount of discount is available for negotiable CDs. This means that they can be brought at a price which is lower than the face value of the CD. This means both the holder and the purchaser of the CDs of this kind will benefit, if the market conditions are holding right for them. On maturity, the purchaser receives the entire discount value of CD from interest accrued.

The conditions and terms of such certificate of deposits are same as the traditional certificate of deposit. The rate of interest may be fixed or variable. The interest is paid monthly, quarterly or at the end of the term of maturity to the account or in check. Withdrawal of the fund before its maturity term attracts penalty because during the entire time of the tenure, the amount is supposed stay locked. However, for negotiable certificate of deposit, the CD is sold against a premium. This normally happens if the prevailing interest rates of the CDs available in the market are lower.

Interests accrued on certificate of deposit, which are negotiable, are similar to the terms of zero-coupon bonds. Holder of the certificate of deposit of such nature does not receive interest income periodically. Instead, the par value or the face value of the CD is paid to the holder at end of maturity. The interest that accrues over the amount effectively fills difference between the original value and the discounted value.

For instance, if the par value of the negotiable certificate of deposit is 10,000 dollars and he/she purchased the CD at a cost of 9,000 dollars and term of maturity of the CD is five weeks, the holder will keep the CD until the maturity date. At the end of the term, the holder of the CD will receive the full face value, which is 10,000 dollars. The first purchaser of the CD of such nature can decide to sell the CD at a particular value. This value will be according to market and often dictated by demand and supply.

There is a significant gain selling the negotiable certificate of deposit at the market. Not only will the investor retrieve the money that he/she has invested when purchasing the CD but in case, they need to have access to the amount of deposit without suffering the penalty charges, they can do so. It might as well so happen that the interest rates of the available CD in the market decrease. In that case, the purchaser can sell the CD to a new holder with a profit. At the same time, purchaser would enjoy the benefit of gaining the full face value of the CD, thus securing an amount of profit for them.

Introduce Yourself to FDIC Certificate of Deposit

Certificate of deposit is an agreement between two parties, where the purchaser agrees to deposit certain funds for specific period of time. Usually it is between any consumer and banks or financial institute or credit unions. The arrangement is with an understanding that during this specific period of time, the consumer would not withdraw the money for any reason. Doing so will attract penalties paid through charges from the fund or the interest. Interest rate over an amount depends on the amount deposited, the period of time it is deposited for and also varies with different banks, credit unions and financial institute. FDIC certificate of deposit is the CD issued from the bank that is insured from the government. If the bank closes or is unable to pay the amount or interest for any reason, this insurance allows the bank holding to be paid off.

FDIC means Federal Department Insurance Corporation which certify the terms of the CD and approves of its actions. Investors feel secure when handling such CD investments because they know beforehand that risks of such CDs have been considerably mitigated. FDIC certificate of deposit can be for over a six months period and also available for ten years period or more time. Such famed investment (certificates of deposit) carries insurance of up to hundred thousand dollars per person from government. Sometimes it goes beyond 300,000 dollars for certain investors.

This is the reason before tendering money to bank, any institution or credit union, one must ensure that the agreement they are entering for is within the safety standards of the FDIC. It is a sort of insurance that can protect someone’s financial future. This is also the reason for which the business owners are one amongst those who consider certificates of deposit profitable if it is FDIC insured. Apart from giving owners the opportunity to investment in risk free venture FDIC covered CDs offer interest rate that do not deteriorate within the entire term of the investment, no matter if the economic conditions are favorable or not.

FDIC certificate of deposit issued by the bank bears a logo. Even credit unions have such insurances like FDIC called National Credit Union Administration or NCUA logo when their certificates of deposit are insured. If logo is not enough to ensure that the bank or credit union partner for your investment is FDIC insured, one can even check with the government or also go through the financial performance of the industry in previous years. There are NCUA and FDIC sites from where one can collect information on such things.

If for any reason the bank site does not carry the logo, one can call the institution to inquire on CD rates and the insurance policy and to know whether the investment is protected. FDIC certificate of deposit is available at varied rates for residents of particular state. There are few banks that cater the same rate of interest for the amount deposited to all residents of any state in the country. One should read the offer documents and compare the terms before agreeing for the arrangement.

How Can You Find the Best Certificate Of Deposit Rates?

One would usually find the best certificate of deposit rates in High-Yield Certificate of Deposit.

What is a High-Yield Certificate of Deposit?

The rates for the High yield certificate deposit are higher, but it usually requires a larger investment on purchaser’s part.

Why people seek high yield CDs?

People who think on a broader perspective and diversify or channel their income into multiple prospective invest heavily on stock market and shares. They needs few of their invested money to buffer the amount of risk they have taken with the shield of a surer way of making money, one of which is the high yield CDs. It shields investors from market volatility, provides security and guarantees return. In addition, unlike others have insurance of the FDIC to allow the investor to enjoy the opportunity of reaping the maximum benefit and stay protected from any faux promises.

How can one find certificate of deposit that gives the highest rates of return?

There are sites online that allows investor to compare the certificate of deposit rates of interest offered from the banks based on the funds deposited and for the number of years one can keep the funds fixed. Over and above, there are advices on the same for helping investors find out the best certificate of deposits. For instance, jumbo certificate of deposits, certificate of deposits from banks that allows raises in the interest within the term of the deposit as well as advices on handling certificate ladder. One can approach professional deposit brokers for advices them through.

High yield certificate of deposit may seem dazzling during the first look over the terms. However, one must carefully understand the terms and conditions to be sure that their financial status allows them to comfortably gel with the stipulations. This is because one may be required to invest the money for lengthy period. During this period, investor would not have access to money. If the money is withdrawn, it may result in penalty. This penalty is often not suitable even if investors have plans for higher certificate of deposit rates of investment for buffering the loss. Hefty investments on investors’ parts, such as close to 250, 000 dollars are also not possible for all.

In order to benefit from the high yield CD, it is important to be acquainted with economy and other investment options. Despite the reports of the recession vanquishing the investors and their savings, there are really some certificate of deposits of high yield that do not carry high extinguishing risks and also huge penalties for early withdrawals.

How to get to them?

1. One needs to check the rate tables for CD

Top notch researchers, banks their finding in highly renowned certificate of deposit rate sites, where one must always pay a visit. In such tables, one may be able to find the rates that top their findings.

2. Contact the banks

After having an idea from the advices put down by the experts, one can approach the banks and have a talk with them to see what sort of maturity period and rates of interest, they are offering. The banks that one approaches can give rates that are competitive to ones on your list. This is because banks often negotiate rates.

3. Contact credit Unions

One must have a look at the certificate of deposit rates there as well. Credit unions do offer higher rates.

4. Try out site where banks and credit unions bid against each other

There are sites, where after you deposit your terms, the banks and the credit unions will bid against each other. This way you get one best high-yield Certificate of Deposit.

Stepping Towards High Yield Certificate Deposit

Customers want high yield certificate deposit. The recession is having its force felt over various investments, and certificate of deposit is not spared from it too. In order to generate enthusiasm amongst investors who have gone weary and tired of investing in low rate certificate of deposit, banks and credit unions, financial institutes are tying up and bringing new and alternative incentives within the certificate of deposit offerings. Latest products are designed. New terms are added to turn products such that it would meet the concerns and the customer need. At the same time, the conditions of low certificate of deposit interest rates and certificate of deposit funds being locked up are thought of in a new light.

The newer improved high yield certificate deposit has liquidity and also flexibility at various levels. How these new certificates of deposits work? Several types of such CDs are present that have the good rates. They are step-up CDs, bump-up CDs and liquid CDs. Here, with step up CDs, the deposit rates increase at predetermined intervals during the tenure of the term of the products. How or when the interest rates will increase is determined by the financial institute.

Bump-up CDs offer opportunity to investor to decide when they would like the interest rates to be increased. There is a limit on how many times the investor can put the request to increase their certificate of deposit rates. Normally it is about one or two times.

The liquid Certificate of Deposit allows buyer to move a part of the fund deposited for a particular period to be withdrawn without penalty. The investor can choose whether or not they want to invest this fund to buy a new CD or invest in other higher rate investment options.

Why this high yield certificate deposit is considered the best?

‘Best’ is never associated with any investment option considering the economic climate we are all in. however, there are plenty of reasons to feel optimistic about some of the aspects of these CDs. One of the first reasons is higher rate of interest and the opportunity to have increased rate of interest at any time during the term. When many are still on the lookout for safer heavens in the current market, such fixed income investments are actually proving to be a useful and helpful bet.

Compared to traditional CDs, the bump up and the step up are clearly an advantage. One need not continue on a lower rate of interest for a long period of time. Moreover, liquid CDs are opportunities for investors to invest in improved CDs and other investment options without worrying about penalty. These new CDs incorporate a lot of customer flexibility. As such, consumer interest has been growing in recent years too. People also feel secure under the new guidelines of the alternative form of high yield certificate deposit.

Risks are involved in such CDs like any other investments. Customers need to see they are not starting off at a completely low rates for the CDs and simply bumping up or stepping up to  a rate that they are already getting someplace else. At the same time there are risks when investing in such high yield certificate deposit that the rates will go up after one has already bumped up the rates once. The new CDs that are being introduced are often available with call options. So, the CD might get terminated. Stipulations regarding when and how one can withdraw the fund exists in liquid CDs.

Insight into Negotiable Certificate Of Deposit

Negotiable certificate of deposit was used by financial institutes as well as the banks as early as in the year of 1960s to cope with their liability and unsafe conditions. In the latter half of the 1980s the Federal Reserve’s discontinued the use of such CDs because it hindered the collection of data. Since only the large banks, wealthy individuals and insurance companies held such certificates of deposit, which could be negotiated, the banks and such other financial institutes were open to negotiation with individuals who had high net worth.

Similar to traditional certificates of deposit, negotiable certificate of deposit were held by the banks or the financial institutes for a particular period of time. The funds fixed through the certificates of deposit could not be withdrawn before the predetermined date of maturity and doing so attracts penalty. The certificates of deposit which are negotiable mature in 1 year or less than a year, which means it is operational over a short time horizon. Before the purchase, the amount, date of maturity and the rates of interest together with the method of calculation of the interest are stated. Some of the larger certificates of deposits which are issued on greater denominations are one million dollars or more.

Even though quite a few of the investors compare negotiable certificate of deposit or T-bills, there are dissimilarities between them. The certificate of deposit, which are negotiable are risky because it is linked with a bank, while T-bills are associated withU.S. government so it is less risky than certificates of deposit that are negotiable. Other than that both are short term investment involving less risks and low rates of investments. NCDs are considered by most of the investors as a good place to house larger capitals, if they have higher rates of interests.

Based in issuer, there are four NCDs. The one which is issued by the bank is called domestic negotiable certificate of deposit. Those that are issued from abroad and denominated in dollars are called Eurodollar NCD. Some international U.S. branches issue Yankee NCD. At the same time, thrift NCDs is present, which are issued by associations of loans and savings.

The deposit amount of the certificate of deposits which are negotiable is quite high. So, only wealthy individuals, financial institutes and banks can afford to have them.  It is usually in the range of hundred thousand dollars. A certificate is offered by the bank to the purchaser guaranteeing the purchaser to get back the entire amount of the deposit in addition to the interest over the amount. The interest rate and the time of the maturity are negotiated between two parties, the bank or financial institute or other organizations and the purchaser. There is a huge active market for the negotiable certificate of deposit. The original purchaser can sell the NCD to a new holder. In such circumstances, both parties benefit from the sell. Usually the market of sell in a secondary bazaar depends on the demand and supply as well as the prevailing rates of interest for the available CDs.

Introduction to IRA Certificate of Deposit

There are traditional as well as contemporary newer and improved certificate of deposit products for investors. Those who would wish to save or have regular income after retirement can invest in products available under certificate of deposit scheme. One of the most popular of all products for the retiree is the retirement account, know are IRA certificate of deposit. There are different varieties of IRAs as well. Investors depending on his/her tax conditions can choose the options that best suit their financial state.

Traditional IRAs permit investors to withdraw fund and invest in opportunities of mutual fund and that too on pre-tax base. There are also IRAs that allow investors to invest after use of tax. It is known as Roth IRA. In Roth IRA, one can invest in mutual fund and also withdraw the capital gains and rates of interests as well as the dividend complete free of tax. A retiree enjoys the benefit of choosing an IRA account, where their term and conditions of handling the funds is fixed by them beforehand. In such accounts, retiree has the opportunities of including the investment in stocks, bond, in certificate of deposits and host of such other options.

What is IRA certificate of Deposit?

In such certificate of deposit, investor can own Roth IRAs or traditional IRAs together with CD inside their accounts. The terms and conditions of such certificate of deposit are same as a regular certificate of deposit. The only difference is that the fund is contained within IRA account.

There are brokerage firms who help retiree to fix the terms of their IRA account, so that they can direct the investment funds to various risk and risk free domains to attain the best possible benefit. One can own certificate of deposit within the self-directed IRA account. Enhanced advantages of tax are involved within the certificate of deposit owned within the IRA account.

How can one incorporate IRA certificate of deposit within their retirement policies?

Rather than just parking your entire fund within savings account, it is best to invest in opportunities that can fetch you benefits. Stocks and bonds are always an option as are certificates of deposit. One needs to balance investment portfolio in such a manner that they can reap the fruits without jeopardizing current financial conditions in any way. For a retiree IRA is the best option because there are additional benefits of tax that help shield some of the loss of assets. There are two ways one can apply for an IRA account. They can go into the site and electronically send in the details by filling application form and transferring the account fund or they can get the print of the application form and send the check in.

Choosing a self-directed account such as the Roth IRA will allow the investor the opportunity to include within its investment portfolio the opportunity of having IRA certificate of deposit. For qualifying for such certificate of deposit, one must have a taxable income and they cannot be older than 701/2. In 2010, the contribution limit for such IRA CDs was $5000.