Certificates of deposit, or CDs, provide a safe investment for people looking to invest their money for a fixed period of time. However, the returns do not historically equal those of riskier investments, such as mutual funds or stocks.
Function
Unlike other demand accounts, which allow you to withdraw money at any time, CDs specify a term for which the money must remain in the account. Bankrate.com states that most CDs require you to commit to terms between three months and five years.
Benefits
CDs receive protection from the Federal Deposit Insurance Corp. (FDIC), which insures your CDs at each bank for up to $250,000. In addition, the rates of return for CDs usually exceeds the rate of return on more liquid deposit accounts.
Warning
Early withdrawals result in significant penalties. According to Bankrate.com, penalties average three months of interest on CDs with terms less than a year, while longer CD terms penalize about six months of interest.
Tags: months interest, three months
