A certificate of deposit is a time deposit, a financial product commonly sold in the United States and elsewhere by banks, thrift institutions, and credit unions.
Certificate of Deposit, CD, is considered one of the most commonly used low-income low-risk investment options. CDs are offered by commercial banks or credit unions as certificate that will entitle the depositor to receive a certain amount of interest until a particular amount of time.
The interest rate is fixed on the total amount of the capital. This means the amount of deposit will increase overtime. CD restricts the depositors from withdrawing the amount prior to the maturity date, which can be a few months or even years. Early withdrawal may subject investor to a penalty.
Let’s elaborate using an example of depositor who purchases a Certificate of Deposit worth $1000 with an annual interest rate of 5% for one year. At the end of that year, the total amount in depositor’s account will be the initial $1000, plus the 5 percent interest that amounts for $50, i.e. $1050. So the bigger the capital, the higher the profit.
However, this is just the general type of CD commonly offered by the banks. Many institutions are now offering a wide range of products that work slightly different due to different terms.
Some of the common types of CDs other than the traditional ones are as follows.
CDs are safe because they protect the capital no matter the market conditions and regardless of how the institution issuing the certificate fares in the future. While it is a low-return option, investors often use it along with other strategies when hedging and speculating.
Financial education is so important, but barely taught at all in our schools. Having resources online is great, but not if they are inaccessible to so many. Thanks 508!