Certificates of Deposit
Smart investors know how to pinpoint and capitalize on the best CD rates available. The quality of CD rates is usually contingent upon two factors: the CD’s maturity date and the current state of the domestic economy.
Bank CDs are Designed for Conservative Investment
CDs usually appeal to investors who are looking to make a conservative investment. You’ll notice that CDs are generally considered a lot ‘safer’ than high-risk investments such as high-yield bond funds, venture capital investments, and real estate speculation. Investors who purchase CDs are effectively locking up a specified sum of money within a certain bank. In return for fidelity to the bank, the bank rewards the investor by paying the accrued interest on the CD once it has matured (or, in some cases, while it matures.)
All banks fight tooth and nail to attract CD investors, because they can add to their overall assets by holding on to CDs. For this reason, you’ll notice that banks will use various methods to beat the competition so that you’ll invest with them. Some banks offer auxiliary services or other bank-related benefits. Many banks use bonus programs so that they can entice current customers into purchasing CDs or tempt new people into opening accounts at the bank.
Different Types of CDs
In the past, most banks just offered fixed interest CDs. A fixed interest included simple CDs that would mature at a fixed rate and then could be withdrawn (called) after the maturity date. Fixed CD interest rates are still very popular due to their reliability. Nowadays, banks offer a plethora of other types of CDs, such as variable-rate CDs, callable CDs, long term CDs, and others.
A variable-rate operates in a manner opposite to a fixed rate CD. The interest rate of a variable-rate CD will fluctuate as the market changes. Each bank uses different stock indexes to adjust interest rates on variable rate CDs. For example, some banks analyze U.S. Treasury Note rates, or the Dow Jones Industrial Average to calculate variable rate CDs.
When you purchase a variable-rate CD, you are essentially betting that interests rates will go up and increase rather than take a fall. It’s a higher-risk investment, but it’s still somewhat conservative. If you believe interest rates will improve, then a variable rate CD can pay off handsomely.
Some banks also offer a type of CD named ‘callable CDs.’ Banks establish a call period for these CDs, and once the call period has expired, the bank can call the CD. Often, callable CDs have a higher yield than non-callable CDs. Another advantage of callable CDs is their shorter than average maturity periods. However, if interest rates plunge and the bank calls your CD, you’ll be forced to reinvest in at lower interest rates. This is just another reason why it’s so important to shop around for high CD rates at banks.
Weigh Risk and Reward
As you can see, you can invest in a variety of different kinds of CDs. It’s best to evaluate how much risk you can afford when purchasing CDs. Remember that its often advisable to keep your investment simple. While they may not be very glamorous, fixed rate CDs are steady and reliable. Or, if you think you can manage a riskier investment, and then go for a more aggressive CD, such as a variable-rate. Either way, CDs can strongly bolster your investment portfolio.