Certificates of Deposit (CDs)

Typical Certificates of Deposit (CDs) are similar to savings accounts. They are issued by banks or credit unions and rely on three main factors: the interest rate, the term (or length) of the contract, and the principal (amount invested). Of course, another factor is the institution from which the investor purchases the CD. While most CDs are purchased directly from banks or credit unions, some brokerage firms and individual financial consultants also offer CDs, and can sometimes negotiate a higher interest rate.

Because CDs are a fixed investment, they are generally considered "safe" or "low-risk." Typically, higher principals and longer terms will result in higher interest rates. The primary risks involved are early withdrawal penalties (should an investor need to liquidate the funds earlier than expected for a financial emergency) and the inability to add more funds during the term.

There are several types of CDs, including fixed-rate, variable-rate, jumbo, negotiable, brokered, callable, Yankee, and liquid. Another type of CD which involves higher risk is the Market-Linked CD. You can learn more about those here. Consulting a qualified Financial Advisor before purchasing a Certificate of Deposit can give an investor peace of mind that this is the right product for them, and that they are getting the best interest rate possible.

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