I can imagine you are probably wondering, if you don’t already know already, why should you care about a CD? The answer is quite simple: CDs are great listening for long road trips and save on your battery life on your phone! Case closed.

I am obviously kidding here; CDs in this context are great financial tools that come in handy for a period of time when you have adequate funds that you don’t feel like taking a big market risk by putting them into the market. Keep in mind that markets can have an effect on banks, credit unions and other financial institutions but CDs are not likely to go up and down as much as your stock in apple or JC penny on a daily basis.

A CD (certificate of deposit) is a savings certificate with a fixed maturity date and specified fixed interest rate that can be issued in any denomination aside from minimum investment requirements. A CD restricts access to the funds until the maturity date of the investment. CDs are generally issued by commercial banks and are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per individual.

A certificate of deposit (CD) is a promissory note issued by a bank or credit union. It is a time deposit that restricts holders from withdrawing funds on demand. A CD is typically issued electronically and may automatically renew upon the maturity of the original CD. When the CD matures, the entire amount of principal, as well as interest earned, is available for withdrawal. CDs typically do not have a fee unless withdrawn before the maturity date. Most CDs offer higher interest rates than those available from savings and money market accounts.

There are some pros and cons to using a CD so you want to do your homework to make sure that a CD will work for you. One thing to keep in mind with a CD is that is not accessible until it’s maturity date without some kind of penalty being incurred, the early withdraw penalty varies depending on your financial institution. The moment money is put into a CD it loses liquidity, the ability to be touched at any time penalty free. CDs operate under the premise that you forfeit liquidity for a higher return. Under typical market conditions, long-term CDs have higher interest rates when compared to short-term CDs. There is more uncertainty and risk associated with holding the investment for a long period of time. In addition, because you are forgoing the opportunity to utilize the funds for a specific period, you are compensated by earning more interest.

Although CDs do not provide a high return, especially compared to investing the same amount in the stock market, investing in CDs is considered relatively safe. The funds are insured, and, assuming there are no early withdrawal penalties, the investment is considered to be as safe as cash in a savings or checking account. As CDs typically pay higher interest than savings accounts, but offer lower returns than stocks, they are a good option for those who don’t need access to the cash for a set period and want to minimize risk. A five-year CD with a 3.15% annual percentage yield (APY) compounded monthly will earn $4,258.48 on a $25,000 initial deposit. The same amount of money kept in a savings account that pays 2.25% would earn just $2,973.86, assuming the interest rate stays the same, something that is not guaranteed with a savings account. Online banks tend to have the most competitive rates for both CDs and savings accounts.

There are also additional benefits to having a CD in terms of negotiability and the style of the CD. Most CDs are non-negotiable, meaning they can’t be transferred, sold, bought or exchanged. In most cases, non-negotiable CDs can be cashed in before maturity by paying an early withdrawal penalty. Negotiable CDs, also known as NCDs, are just the opposite. They can be sold in the secondary market but can’t be cashed in before they mature. With few exceptions, NCDs are issued in large denominations of $100,000 or more. Another feature of NCDs is that they are short term and have maturity dates of between two weeks and one year.

Most financial institutions also offer promotional rates on CDs depending on the amount brought and have specific stipulations as well. Those stipulations can include the term, if a percentage of it are new funds to be deposited, or even in some cases, a rate match from a rival institution. There are also special CDs you can get depending on your institution. Here are some of the different types:

1. Liquid CDs: These feature low or no penalty for early withdrawal, overcoming one of the main objections people have about CDs. This feature comes at a cost, including a lower rate of return, and, in many cases, a minimum balance requirement. Even with those caveats, in a fluctuating interest environment, liquid CDs enable you to move your funds to a higher-paying certificate when opportunity presents itself.
2. Bump-Up CDs: Like liquid CDs, these have a lower interest rate than fixed-rate CDs but let you take advantage of a new higher interest rate and apply that rate to your existing CD. As with liquid CDs, bump-up CDs may also require a high minimum deposit. Bump-up CDs also typically limit the number of times a higher rate can be activated, depending on the length of the term.
3. Step-Up CDs: These are often confused with bump-up certificates, although they are not the same. Unlike bump-up CDs, which allow you to take advantage of a higher rate, step-up CDs raise rates at regular intervals on a preset basis. It’s important to know what the overall (blended) interest rate is and compare that with a regular CD of the same term length.
4. IRA CDs: These are regular CDs held in a tax-advantaged individual retirement account (IRA). As CDs offer relatively low interest rates compared to other investments, taking up a significant part of your annual IRA contribution limit with CDs could lead to much-lower-than-expected returns in your IRA retirement account. These are a personal favorite of mine
5. Brokered CDs: These are sold through brokerage accounts and sometimes offer better rates than those sold through a bank or credit union. It’s important to make sure the brokered CD is FDIC insured or offers a high enough interest rate to outweigh the risk when it isn’t insured. It’s also worth noting that brokered CDs can be difficult to get out of when you want to exit the investment.

There are also other types of CDs such as save to win CDs (these give you a chance to deposit multiple times into a 1-year CD program and every set amount is deposited you get an entry into a sweepstakes for cash prize, think lottery but no way to lose) and other CDs your institution may offer that haven’t been brought out to the public yet.

As someone who has a CD and helps people obtain them I can confidently say that these are excellent saving tools. These are for the more risk adverse and those who want to diversify their investments. Additionally, these funds can be pledged on secured loans as well and be used as collateral. That can helpful in seeking a lower rate of interest on your loan and help build up your credit. CDs are a cool thing and you can expect these to stay in style for a while. Invest wisely my friends. Excelsior!