Traditional certificates of deposit (CDs) act as enhanced savings accounts.
Investors give money to a bank, which then agrees to pay a fixed interest
rate—generally for a period of five years or less. While investors can
withdraw cash from a savings account at any time, CDs require them to
keep the funds at the bank until the maturity date. Because of this
limitation, they tend to pay more interest than typical savings accounts.
CDs can’t replace any of the other investments mentioned in this
chapter. They simply provide you with a means to generate more interest
on your cash holdings than you’d get from a bank savings account or a
brokerage account.
Pros:
Safety. Like other bank accounts, CDs are insured for up to
$250,000 by the Federal Deposit Insurance Corporation (FDIC) in
the event the bank fails. Brokerage accounts do not receive FDIC
coverage, though the Securities Investor Protection Corporation
(SIPC) does provide similar, if less comprehensive, protection.
No fluctuation. Because your funds remain in cash, they won’t
decline in value.
Simplicity. If you understand savings accounts, you already know a
lot about how CDs work.
Cons:
Low returns. While CDs generally offer more interest than bank
savings accounts, they’ll lag behind all of the other investment
classes discussed in this chapter over the long haul.
No liquidity. CDs tie up your cash for a period of time. You can
access the money if you need it, but you’ll pay an early withdrawal
penalty or forfeit some of the interest.
Separate accounts. Most investors purchase stocks, bonds, and
mutual funds from institutions other than banks. If you keep your
cash in a bank CD, you must keep it at the bank, which means you
can’t redeploy it to purchase stocks or bonds until you transfer the
money to a brokerage account.
Certificates of Deposit.
