A certificate of deposit (CD) is a financial product offered by banks and credit unions that offers a fixed interest rate payment for a specific period of time. Nearly every financial institution offers CDs as an option and, like other banking deposits, the Federal Deposit Insurance Corporation (FDIC) insures standard CDs should the bank fail. Therefore, CDs are among the lowest-risk investments and do not lose value. However, there are some types of CDs that are not insured by the FDIC.
- A CD is a product that offers an interest rate payment in exchange for the customer agreeing to leave the lump-sum investment with a bank for a specific period of time.
- Standard CDs are insured by the FDIC up to $250,000, so they cannot lose value.
- However, other types of CDs, such as bear, bull, and Yankee CDs are not FDIC insured and carry greater risk.
How Standard CDs Work
CD accounts held by consumers of average means are relatively low risk and do not lose value because CD accounts are insured by the FDIC up to $250,000. Taking an early withdrawal from a CD account can result in getting less money than you invested, though such losses are not considered “losing value.” CDs provide account holders with interest rates that are generally higher than average savings and checking accounts, which is why some consumers opt to open them.
Typically, you can open a CD account with a minimum of $1,000. CD account terms can range from seven days to 10 years, depending on the amount of money deposited. Banks allow you to renew or close a CD account upon its maturity. You can usually withdraw the interest earned on a CD at any time without penalty, but you must pay a penalty fee when you withdraw part or all of the principal before the maturity date.
Brokered CDs carry more risk because licensing and certification are not required for deposit brokers.
Brokered and Other CDs
Investors with a higher risk tolerance can buy CDs from brokerage firms or salespeople other than banks or credit unions. Called brokered CDs, they are technically not FDIC-insured (though the broker’s underlying CD purchase from the bank is) so they can be risky. Principally, licensing and certification are not required for deposit brokers, so you should exercise due diligence and research anyone claiming to be a deposit broker before you choose to open a brokered CD.
There are several other forms of CDs as well. These include the bull CD, bear CD, and Yankee CD. While a bull CD offers a minimum interest rate relative to the performance of a market index, the interest rate paid by a bear CD varies depending on whether the market index moves lower. Bull and bear CDs can offer higher interest rates than traditional CDs and are considered to be relatively conservative investments, but they are not insured by the FDIC. Lastly, a Yankee CD is a CD issued by a foreign bank for American investors and, like bull and bear CDs, is not directly insured by the FDIC.
Is it safe to buy a CD through an individual broker or salesperson?
It can be, but there's risk. Make sure to check up on the company or bank they work for, taking notice of complaints. Since individual brokers or salespeople are not officially licensed or approved, be aware.
Why should I open a CD account?
CDs allow investors to earn more interest than typical savings accounts, and they are fully insured up to FDIC limits when obtained through a commercial bank.
What is the best way to research CD rates?
You can search online for best CD rates or best rates for a certain CD term to see what major banks and smaller financial institutions are paying in terms of annual percentage yield on CD deposits. You can also check online or in person with banks or credit unions where you maintain accounts. Major brokerage firms also feature brokered CD rates from partner financial institutions.
The Bottom Line
While it can be prudent to question whether any investment can or will lose value, certificates of deposit represent a very safe option for savings as they are federally insured up to $250,000 per account. Only in rare cases where a brokered CD account is not insured or for unusual CD products where the return is indexed to stock market movements rather than paying a fixed return could a loss of principal potentially be experienced.