What Is a Certificate of Deposit?
Certificates of Deposit (CDs) are somewhat similar to normal savings accounts. A customer can put money into an account, have interest accrue on that money, and then withdraw the money for the customer¿s own personal use. However, CDs function differently than savings accounts in a couple ways: - Higher-yield interest ¿ the interest rates offered with CDs tend to be higher than those offered by banks for regular savings accounts. This, of course, is the enticement of investing your money into a CD instead of a savings account.
- Period of investment ¿ unlike many savings accounts, CDs tend to have time periods attached to them in which the customer cannot withdraw any money. This period could be for months or years, depending on the type of CD the customer chose. If the customer does withdraw money during this period, she will be subject to a penalty fee.
Banks are not the only ones who offer CDs now. Brokerages and individual sales people offer CDs with interest rates meant to compete with banks and any other financial institutions that offer CDs. So remember, you are not just limited to your local bank when looking for a CD. What Should I Be Aware of When I Am Shopping around for a CD?Like any investment, you should not just dive into a CD without knowing anything about it. There are few items of information you should request from the bank or broker who is issuing the CD: - How long is the maturity rate? ¿ different CDs take a different amount of time to mature. Some CDs mature in a matter of months, while others can take upwards of 20 years. It is important to find out if the CD matches the ideal length of time you had in mind for investing.
- Who is your broker? ¿ brokers are not subject to the same licensing and other types of federal regulation that banks are subject to. In other words, anyone can be a deposit broker. Do some background checking on your broker to make sure they do business on the up-and-up.
- Where is your broker putting your money? ¿ banks will usually insure your CDs up to $100,000. If you already have a CD in one bank and opening another CD there might put you over the $100,000 mark, you may want to consider opening the CD with another bank. That is why it is important when dealing with a broker to find out where exactly they are putting your money.
- What are the ¿call¿ features on the CD? ¿ let¿s say you opened a CD when interest rates where high. After about a year interest rates have dropped significantly, putting you in a good spot, but not your issuer. Many banks now attach what is referred to as a ¿call¿ feature on CDs, meaning that they can choose to terminate the CD at any time they wish.
Who Should I Refer to if I Have Any Questions or Concerns about Taxes, Broker Fraud, or Any Other Subjects Concerned with CDs?
If you have a question about the tax consequences of your CD or have been the victim of fraud that was perpetrated by your supposed ¿broker,¿ you may want to consult a securities law attorney. Your lawyer will be able to answer any legal questions you have. If you are having legal troubles such as being defrauded, your attorney can help you decide on what course of action to take to remedy your problem in the best way possible. |
