Are you thinking about adding CDs (certificates of deposit) into the spectrum of financial products in your investment portfolio? Make sure you understand the pros and cons before you invest using CDs.

CD Basics

This is how CDs work: A lending institution will sell you a CD for a specified amount of money for a specified amount of time and rate of return. For example, you may buy a five-year CD for $10,000 with a three percent rate of return. This means the financial institution will hold onto your $10,000 for five years, and at the end of the five years, the lender will return your $10,000 to you with the three percent interest earned.

CD Terms and Rates

CD terms and rates vary from lending institution to institution. Typically, rates are linked to length of time invested. You usually won’t find a CD that matures in less than eighteen months, and you’ll find these short-term CDs pay out a very small percentage rate. The most lucrative CDs mature in a matter of years, like five, ten or fifteen years, but even those long-term CDs usually only return rates of three to five percent.

Benefits of CDs

CDs are some of the safest and most reliable financial products available, so they appeal to people who want a sure-fire return on their investments. The return rates are guaranteed and the FDIC usually insures the lenders.

Downsides of CDs

Once your money is in a CD, you cannot withdraw it until the maturity date without heavy penalties, meaning your money is tied up until the maturity date. They also usually deliver low interest rate returns when compared to other financial products.

Stocks

Before you invest in a CD, you will want to investigate stocks, which are highly volatile but can deliver both extremely high rates of return or high losses, but also afford you flexibility and easy access to your money, since you can sell stocks at any time.

Mutual Funds

You will also want to look into mutual funds, which are safer than stocks because they are tied to a group of investment entities instead of one single stock, but which also can deliver higher rates of return and provide easy access to your money.

Bonds

Bonds are similar to CDs in that they provide a fixed rate of return, but they can be attached to either public or private enterprises, and the risk of failure is higher since they are not insured by the FDIC. 

Overall, CDs are one of the safest investment products available. However, the low rate of return and time commitment may prove to be a deterrent for some.