Should I Invest In Certificates of Deposit?

This is the 2nd installment of the series 7 Alternatives To The Stock Market

Certificates of deposit, or CDs, are a popular way to invest money with no risk. CDs basically involve putting your money in the bank for a fixed amount of time, until it matures, where it will receive a certain interest rate.

Interest rates for CDs vary according to several different factors. Different banks can offer different interest rates. Typically, though not always, larger deposits receive larger rates. Longer maturities can also receive higher rates, though again, this is not always true. The FDIC normally insures deposits up to $100,000; until the end of 2009 deposits of up to $250,000 are insured. CDs are sold by banks as a way to guarantee that they will have money on hand, so they give higher rates than a savings account. In order to discourage you from taking your money out before it matures, banks do charge a penalty if you do so. However, since they are relatively easy to break compared to Treasury Securities, they usually receive a lower interest rate.

CDs usually have a locked in interest rate. There are some variable-rate CDs that allow you to change your rate once before it matures. These are good because this way if the rate goes down, you are protected. However, if it goes up, you have the option of bumping up to the new rate and making more money.

Interest from CDs can be dealt with in several different ways. You can choose to have the interest reinvested, in which case you’ll be getting compound interest. Or you can have the interest mailed to you as a check or deposited in a different account. Both of these have advantages, you can either make more money in interest or get some of the money to use right away.

CDs are one of the safest ways to invest your money. However, because CDs require no risk under $250,000, they do not typically pay as high interest as other investments do. However, if you are able to lock your money up for a long period of time, you could get a sizable return. If you are looking for a low risk investment, CDs may be right for you.