What Is a Certificate of Deposit (CD)? l St. Johns Bank
One of the most stable investment options we offer at St. Johns Bank is the traditional certificate of deposit (CD). While they have been around for years, they’re still little-understood and often-ignored. And the confusion isn’t helped by the fact its abbreviated name is the same as that for an audio file format.
That lack of recognition is a shame because it could mean investors miss out on an opportunity to put money away in a long-term, relatively safe investment instrument. We offer this information to help you ensure you don’t become one of those.
Low Risk, Long Term
When you open a CD, you provide a set amount of money to be held for a set amount of time.
That’s why these are sometimes called “time deposits.” When you redeem the CD on its maturity date, you receive your original investment plus the interest it earned in the period. If you choose to roll the investment over, it typically continues for another term the same length as the first, with a new interest rate based on the current rate on the date of renewal.
Conversely, if you choose to take your money out of the CD before the term expires, there is often a penalty charge that could be significant depending on how far into the term you are.
Since CDs provide guaranteed return of your initial investment plus interest as set out in the terms you agreed to with the bank, they’re considered a very safe investment. CDs are also covered by the Federal Deposit Insurance Corporation, so your principal investment is typically covered up to $250,000, no matter what.
The safety comes from the fact the money in a CD doesn’t go into stocks or other variable return instruments. Rather, the bank essentially holds the money and provides the interest off other returns it collects.
The Trade-off: Low Risk, Low Rate
The exchange for the safety is the CD may provide lower rates of return than some other investments, at least while markets and other investment perform well. However, the interest rate for a CD increases based on the length of the term.
If you’re interested in the safety of a long-term CD, contact one of the investment experts at St. Johns Bank today!