How do you start investing in CDs?


Quick Answer

Most banks and investment firms offer Certificates of Deposit, also known as CDs, explains the Securities and Exchange Commission. Long-term CDs generally offer the best interest rates but tie up an investor's money for a long period, which is problematic if an investor suddenly needs the money, explains NerdWallet. Consider using a CD ladder, which combines multiple CDs with different lengths, to get the benefit of long-term interest rates while retaining more frequent access to an investment.

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Full Answer

CDs are low-risk, fixed-term savings accounts guaranteed by the Federal Deposit Insurance Corporation for amounts up to $250,000, explains NerdWallet. Investors cannot access the money in a CD before it matures without paying a penalty. Financial institutions offer a variety of CDs, each with various term lengths, such as variable-rate CDs, callable CDs and IRA CDs.

As of 2015, most available CDs have very low interest rates, reports CNBC. Financial institutions adjust the interest rates they charge on CDs approximately in step with the Federal Reserve's benchmark rate. However, rates vary considerably between financial institutions, and industry specialists recommend that investors shop around. The SEC states that investors should check the fine print very carefully when financial institutions advertise high-yield CDs, as they may have onerous conditions or higher risks. Nevertheless, some CDs continue to offer better rates than treasury bonds, which have a similar level of risk, according to Investopedia.

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