Investing In A Certificate Of Deposit: Is It Worth The Risk?
Are you having second thoughts about investing in a certificate of deposit? Since it will be involving your money, you might be worrying about the potential risk that it can have. This article will help you decide on whether or not to invest on a certificate of deposit.
Before everything else, let us take a look at what a certificate of deposit or CD is all about. This is a time deposit offered to consumers by banks, thrift institutions, and credit unions. Like a savings account, a certificate of deposit is inured so you do not have to worry about the risks. CDs are protected by the Federal Deposit Insurance Corporation (FDIC) for banks or by the National Credit Union Administration (NCUA) for credit unions. However, unlike a savings account, certificates of deposits have a fixed term and interest rate.
Certificates of deposits are designed to be kept until the maturity period. In return, the bank or financial institution will grant higher interest rates than on accounts that can be withdrawn anytime. CDs will require a minimum deposit and you will receive a passbook or paper certificate. It usually involves a book entry or an item shown in the consumer’s periodic bank statements.
When considering investing on certificates of deposits, you first need to determine your time frame. If you will not be using the money in the near future or very soon, then certificates of deposits can be an option. Likewise, you should take a look at the interest rate. This will usually be dependent on the prevailing rates. So for example, if inflation is on the rise, go for a short-term CD. But if the economy is falling, opt for a long-term CD.
When taking out a CD, choose what’s best for your situation. If you are looking for a two-year investment but do not want to have a low rate, a bump-up CD may suit your needs. On the other hand, a liquid CD will let you take out a part of your deposit during an emergency. Another way is to considering “laddering.” This way, part of your deposit can be made available while you are protected from increasing interest rates.
Frank Marks is a writer and blogger for a business merchandise company selling business pens in bulk . He writes helpful guides about a wide range of topics but concentrates most on business, technology and travel-related posts.