A CD, or Certificate of Deposit, is a type of Time Deposit offered by banks and credit unions. It is a relatively low-risk investment option that allows you to Earn Interest on your deposited funds over a fixed period of time, known as the CD’s term.
Here’s How it works:-
1] Deposit:- To open a CD, you deposit a specific amount of money with the Financial institution. There is usually a minimum deposit requirement.
2] Term:- You choose the term or duration of the CD, Which can range from a few months to several years. Common terms include 3 months, 6 months, 1 year, 2 years, and 5 years.
3] Interest Rate:- The Financial institution offers you an interest rate for the CD based on the term and current market conditions. The interest rate may be fixed or variable, depending on the type of CD.
4] Interest Accrual:- The Interest on a CD can be calculated in different ways. The most common methods are Simple Interest and Compound Interest. Simple Interest is calculated based on the initial principal amount, While compound interest is calculated on the principal plus any previously Earned Interest.
5] Withdrawal Restrictions:- Once you Deposit money into a CD,It is typically inaccessible until the CD matures. Withdrawing funds before the maturity date may result in penalties or loss of earned interest. However, some CDs offer the option of early withdrawal, albeit with a penalty.
6] Maturity:- When the CD reaches its maturity date, you have several options. You can choose to withdraw the principal and interest, renew the CD for another term, or make changes to the CD, such as adding more funds.
7] FDIC Insurance:- CDs offered by banks are usually insured by the Federal Deposit Insurance Corporation (FDIC) up to the maximum limit allowed by law, currently $250,000 per depositor, per bank. This Insurance protects your funds in case the bank fails.
CDs are Popular among individuals who want a Secure Investment with a fixed return over a defined period. They offer more stability compared to riskier investments like Stocks, but the trade-off is generally lower returns. It’s important to consider your Financial goals, liquidity needs, and the prevailing Interest rates before investing in a CD.