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withdrawing their money for a specified period of time - whereas money in savings and checking accounts is able to be withdrawn at any time.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. Managing Wealth

    How To Create A Laddered CD Portfolio

    Laddered certificates of deposit offer safe capital and predictable cash flow, while bringing simplicity to your portfolio.
  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. Managing Wealth

    Save Smart With A CD Ladder

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

    Money market investments or CDs: Which are better?

    Find out which short-term savings vehicle, a money market account or a certificate of deposit (CD), is a better investment for your needs.
  5. 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:
  6. Personal Finance

    Get the Best Savings Interest Rates For You

    How do you choose between market deposit accounts, CDs and traditional savings accounts?
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Risk Tolerance

    The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important ...
  4. Donchian Channels

    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
  5. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
  6. Moving Average - MA

    A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out ...
Trading Center