What is a certificate of deposit?
Whether youre looking for a conservative investment outlet or are in the process of saving for a business goal, a bank CD might be a good option. The abbreviation CD stands for certificate of deposit, a financial product offered by banks or other financial institutions like credit unions. You purchase a CD with a lump sum deposit, agreeing to leave it untouched with the bank in exchange for an interest rate premium. The specific deposit terms, interest rates, and conditions will depend on the financial institution. Almost every brokerage firm or bank offers multiple types of CD options. Some banks charge for early withdrawal, while others dont. Its well worth shopping around, because the highest paying CDs offer more advantageous interest rates than even the best savings accounts. Certificate of deposit vs. savings account  While both types of financial instruments are based on setting money aside, there are a few differences between CDs and savings accounts. Both options yield returns over time, but while savings accounts let you change your balance with additional deposits and withdrawals, CDs require that your initial deposit stays put until its maturity date. Generally, the longer youre willing to leave your deposit in the account, the more money you can make. As a result, a bank CD can be an attractive alternative to anyone who wants to earn more interest over time than they would with a checking or savings account. There are a few different types of certificate of deposit, varying by term length and interest rate. Yet no matter the terms, opening a bank CD works pretty much the same way as with any other bank deposit account. The main difference is that when you sign a contract, youll be agreeing to leave your deposit in place until the CD reaches maturity. This could be in as little as three months, or as much as 10 years or longer. Heres what to look at when youre comparing CDs:  Principal: This is the amount of money youre agreeing to deposit with the bank in order to open your certificate of deposit. Interest rate: Locked interest rates provide a clear, quantifiable return on your deposit. If the rate is fixed, this means that the bank cant change it. Term length: This refers to the amount of time youre agreeing to leave funds deposited. If you withdraw before the end of your term, youll typically pay a penalty charge. After youve agreed to a principal, term, and interest rate, youll sign the contract and receive financial statements every period. These give you an update regarding your current deposit amount with interest. Although no financial product comes entirely without risk, CDs are one of the safest investment or savings vehicles out there. With a fixed, guaranteed interest rate, theres no chance that your return will be subject to market fluctuations. In comparison to stocks and bonds, CDs offer a less volatile option. However, to ensure that theres no certificate of deposit risk, you should make sure that you only make an investment with a federally insured or accredited banking institution. There are several benefits to opening a certificate of deposit:  It offers a predictable rate of return in comparison with more volatile investments like stocks and bonds. Although it depends on the different types of certificate of deposit, CDs can offer higher rates than comparable savings accounts. It can help you save your money, since your deposit is locked away and cannot be touched. However, a bank CD might not be the best option on every occasion. There are also a few drawbacks:  A CD isnt as liquid as a regular savings account. You cant liquidate your funds before maturity without penalties. With fixed interest rates, you wont benefit from a rise during the agreed-upon term. You wont reach the same earning potential as you might with stocks and bonds. These pros and cons are all worth consideration to determine if a CD is right for you. We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.