Certificate of Deposit

Financial Dictionary -> Investing -> Certificate of Deposit

Certificate of Deposit or CDs, are generally offered through credit unions and banks. They are similar to savings deposits yet different in that a CD has a fixed term. The term may be 3 months, 6 months, 9 months or several years. Investing in a CD usually gives the investor a higher rate of interest than a regular savings account. Some CDs charge a fee, or penalty, if the money is withdrawn before the specific term is complete. In some cases, an investor may prefer a 'penalty-free' CD, particularly if he plans to withdraw the money soon or if he wants access to it without waiting for the specified time period. Fixed interest rate on CDs are fairly common, but some financial institutions may offer variable rates as well.

A helpful tool in calculating your earnings on a CD can be found at: Financial Calculators. You can use this CD calculator to calculate how much interest you'll earn on your Certificate of Deposit.

When purchasing a Certificate of Deposit, you deposit a set amount of money for a fixed time period. As the money stays in there, it earns, or accrues, interest. Withdrawing the money early may incur a penalty unless you've purchased a penalty-free Certificate of Deposit. However, if you leave the money in there until the fixed term is up or until it 'matures', you may withdraw it, plus the interest it earned, without a penalty. Or you may choose to 'roll it over' which means, instead of withdrawing the money, you can deposit it into another CD. Usually your financial institution will mail you a notice stating that the maturity date of the Certificate of Deposit is nearing so you'll be aware and can decide which route you'd like to take. If no action is taken, the financial institution may 'roll over' the CD automatically. To make sure this doesn't happen, and tie up your money for another period of time, you may request when you open the CD that they not automatically roll it over. Note that there is a window of time after the CD matures, usually a few days, where you can take action.