What is A CD?

For those who have a few dollars to invest in today's economic crunch and are looking for a safe return on your investment a Certificate of Deposit, also known as a CD may be an option to consider. If you are not sure about what is a CD or how it works here are advantages and disadvantages.

When you ask yourself What is a CD and why should I invest in one is a question many people ask themselves, their bankers, or their financial advisors. Simply put, a CD is similar to a savings account that has a fixed interest rate of return that is realized or earned over a predetermined time frame.

Many institutions offer a CD for time frames of 6 months all the way up to 10 years. The longer the term, the higher the interest or payoff will be at the end of the term. The rates are very competitive. Before you buy it is a wise decision to shop around to earn the highest rates of return.

If you'd like to learn more and see how fast your savings will rack up, many sites have calculators and charts that will show you how much you can earn based on the amount of your investment and the term of the CD being purchased. This is a good reference tool that will show you how quickly the savings add up.

An important fundamental in learning what is a CD, is that there is penalty for early withdrawal. This means if you withdraw money before the term ends, you will pay a financial penalty which in some cases can be a significant loss. The trade off for this is that you should get the best CD rates. You should not just stumble into your bank, however. The best CD rates can be found online with a bit of research.

There are plenty of resources for additional education on resources. If in doubt talk to a financial planner who can advise you based on your needs.