Next video:
Loading the player...

A certificate of deposit (CD), is a common financial product sold by banks, thrift organizations and credit unions. Customers buy CDs to earn interest while keeping their money safe. Bank CDs are insured up to $250,000 in the U.S by the Federal Deposit Insurance Corporation (FDIC) and are usually considered risk free.

Because they are virtually no-risk, their interest rate is among the lowest of any financial product. Financial products that involve more risk and are not insured by the FDIC or any other entity tend to pay higher interest rates.

To buy a CD, customers agree to deposit their money for a specified period of time. The shortest timeframe is usually one month, with the longest running up to five years. 

In return for committing their money for a period of time, the customer earns interest. The interest rates are pre-determined by the institution, and typically remain fixed over the length of the CD - though some institutions may offer CDs whose rates can increase. The longer the length of the CD, typically the higher the interest rate paid.

When the CD's time period is complete, a CD is said to “mature.” Shortly before this, the institution will notify the customer, offering them the option to either withdraw the money with interest earned, or re-invest the money for another period.

CDs pay slightly higher rates than savings and checking accounts because the customer commits to not withdrawing their money for a specified period of time - whereas money in savings and checking accounts is able to be withdrawn at any time. If they need to, customers may withdraw their money before the CD matures. However, this requires a penalty to be paid.

CDs typically range in size from $1000 to over $100,000. Larger CDs over $100,000 are typically called Jumbo CDs.

Related Articles
  1. Investing

    Are CDs Good Protection For The Bear Market?

    Certificates of deposit promise stable income in any market, but do they deliver?
  2. Investing

    How To Earn The Most From CDs When Interest Rates Are Low

    Certificates of deposit might not seem like a good place to keep your money when interest rates are low, but they do offer security and stability. And with laddering and studying promotional ...
  3. Investing

    Getting Certificates of Deposit (CDs) in Emerging Markets: Risks and Rewards

    Learn about the risks and rewards associated with investing in a certificate of deposit (CD) offered by an emerging market and what to consider before buying.
  4. Managing Wealth

    Save Smart With A CD Ladder

    A CD Ladder allows you to stagger your investments and take advantage of higher interest rates.
  5. Investing

    CDs Vs. Inflation: Are They Keeping Up?

    Learn how to determine whether the money invested in certificates of deposit (CDs) can keep pace with the rate of inflation and how you measure inflation.
  6. Investing

    Long-Term Investing With Equity Index CDs

    Equity Index CDs are perfect for investors who don't mind hanging in for the long term.
  7. Investing

    CDs or Bonds: Which Investment is Better For You

    When choosing between CDs and bonds, investors who seek to maximize their returns but also want a large measure of safety should consider the following:
Hot Definitions
  1. Preferred Stock

    A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
  2. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  3. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  4. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
  5. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  6. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
Trading Center