We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is a CD?

Malcolm Tatum
By
Updated: May 17, 2024
Views: 2,848
Share

CDs, or certificates of deposit, are financial instruments offered by many banks, credit unions, and other types of thrift institutions. The certificate of deposit provides the consumer with the ability to deposit a specific sum into a deposit account. In return, a competitive rate of interest is applied to the balance. Classified as a time deposit, the CD is assigned a maturity date, with the accrued interest applied at the point of maturity.

The CD is considered an excellent way to begin a savings program. Like the standard savings account offered by most banks, the bank CD is a relatively low risk investment, with almost no chance of losing money on the venture. However, bank CDs tend to carry a higher interest rate than even the best savings accounts, making it more attractive to anyone who prefers safe investing but wants to earn more on the deposited balance.

Establishing a CD with a local bank or other financial institution is an easy task. The account is opened, and a specified amount is placed into the account. Most banks have a minimum amount that must be placed into the account at the time the CD is established. Along with making the deposit, it is necessary to select a fixed amount of time for the account to accrue interest. Most plans of this type call for anywhere from six months to two years. Once the account is established, withdrawing funds from the CD is very difficult to accomplish, and carries substantial penalties.

When the maturity date is reached, the total amount can be rolled over into a new CD, allowing the process to begin once more. However, it is not unusual for bank customers to have the interest earned transferred into an account where those funds are readily available, such as a checking or savings account. The principle is rolled into another CD with a new maturity date, making it possible to continue earning interest on those funds.

Many investors who favor the use of certificates of deposit will establish several of these accounts, each with a unique maturity date. If arranged properly, it is possible to earn interest income that becomes available several times a year. This can be especially helpful when seeking to create a small but consistent source of income without spending the principle sum used to generate the interest.

Because of the competition among different financial institutions, it is possible to shop for the best interest rates before establishing a CD with any one institution. Generally, the rates of interest will be higher for certificates of deposit that carry a longer duration until maturity. For people who can reasonably expect to not require the funds deposited into the account for a longer period of time, going with a medium-term rather than a short-term certificate of deposit is an excellent option.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Editors' Picks

Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
Share
https://www.wisegeek.net/what-is-a-cd.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.