Basics of Certificate of Deposit

Certificate of Deposit or CD is a type of monetary deposit wherein the money is placed in the financial institutions in a pre-determined amount of time. Certificated of deposit is closely associated with time deposit except that certificate of deposit could be transacted to different financial institutions.

Like the time deposit, the depositor is expected to let the principal go undisturbed in a specified amount of time. After the determined number of years, the depositor can either let the Certificate of Deposit stay or withdraw the amount with the interest earned. Since the fund is trusted on the financial institution for a good number of years, the interest rate is considerably higher compared to regular savings account.

The terms and conditions of Certificate of Deposit depend on which financial institution you are dealing with. Banks are usually the most flexible since they can offer this type of deposit with the opportunity of renewal every 90 days.

There are even banks that offer the opportunity of renewal every 30 days. This means that every 30 days, you can either reduce or add your deposit. On the other hand, lending institutions that offer Certificate of Deposit will require their depositors to let their funds stay for a year or two. There are even financial institutions that offer five-year deposits without any tax deductions.

Advantages

Certificate of Deposit is often preferred by those who are willing to invest their money in the safest way possible. Compared to stocks, the interest rate or the rate of increase of finances of the depositor is much lower but the depositor is assured of an increase no matter what the fiscal performance of the banking institution. Stocks on the other hand could be very risky since the rate of increase depends on the company’s performance.

Another advantage of Certificate of Deposit when compared to other financial institutions is the flexibility of controlling your finances. Although you can still control your finances in stocks through a broker, the effect of that change may not be as swift as you think.

Certificate of Deposits will give the depositors a chance to be directly involved on how much they are willing to invest. They can even receive the earnings in terms of the accumulated amount through interest rate. Stocks and other types of investment will require time since it will pass through the broker or the person that handles your stocks.

Disadvantages

The safety of Certificate of Deposit is also its main disadvantage. Certificate of Deposits are so safe that the interest rate is very small compared to other types of investment. Most of the investors who tried Certificate of Deposit end up withdrawing their money prematurely because of slow increase of their investment.

Early withdrawal will also merit penalties which mean the depositor will have to pay fines and taxes which could be deducted from the principal amount. Instead of additional earning, the depositor ends up losing a significant amount due to fines and taxes.

Another disadvantage of Certificate of Deposit is the loss of opportunity. The interest rate within five years will significantly increase. But since Certificate of Deposits is locked on an interest rate when it was started, it is unable to grab the opportunity of getting the higher interest rate and earn even more.

Certificate of Deposit is the safest way to invest and grow your finances. Banks value this type of deposit and their appreciation is shown through higher interest rate compare to regular savings account. But careful consideration should be made since certificate of deposit will require their depositors to let their money stay in the financial institution for years.