Why is a Certificate of Deposit Considered such a Safe Investment?

1.- WHAT IS A CERTIFICATE OF DEPOSIT?

In simple words, a Certificate of Deposit (also known as CD) is a kind of savings account that is characterized for holding a fixed amount of funds within a certain amount of time. Traditionally, the amount of time can be six months, 1 year, or even extended periods like 5 years, everything will depend on the issuing bank and the requirements of the individual who request a Certificate of Deposit.

The key feature of a CD is the fact that when it comes the time of redeeming it, not only will you receive the money that you have originally invested, also, the bank will issue all the interests created additionally, meaning that it could become a solid investment when things are done properly. Like with any other investment, there are many benefits but also risks, and in the case of Certificates of Deposit, everything will be extremely linked to inflation, meaning that if this factor grows faster than your money, then returns will be lower and furthermore no true gains will be obtained.

2.- WHY IS A CERTIFICATE OF DEPOSIT CONSIDERED SUCH A SAFE INVESTMENT?

The reason why CDs are certified as a safe investment is for the simple fact that they are guaranteed by the federal government. This means that traditional Certificate of Deposits (the provides by banking institutions and not external groups) will not be dangerous in any way as having the protection of massive organizations always pays off in terms of security.

To understand how CDs can be considered a safe investment, it is important to learn how do they work and how they manage to provide magnificent returns on most occasions. First of all, the CD must be done with a deposit of up to $250,000 for depositors at each bank.

That number is not certainly a small number, that is how the bank can work by promising that the initial amount will always be recovered after the specified time has passed. They manage to recover the money by getting more depositors during the time in which your funds are stored within the banking institution.

2.5 CAN CDS RETURN A LOT OF THE INVESTED MONEY?

For starters, all of the initial deposit is always recovered at the end of the deposit period, meaning that it is practically impossible to lose money on this investment scheme (only if a sequence of troublesome events happens in the world). When investing with a mutual fund, the return comes when the value of the fund increases, and while you might not become a millionaire unless you play your cards extremely well, thanks to the payment of interests, it is possible to make good money without exposing yourself to scams or any fraud scheme.

Keep in mind that during the period that you have agreed with your bank, you will not be able to make any withdrawal from a certain period of time. While this sounds fair, it could become a troublesome situation in cases of emergencies when those funds are required. But luckily, the banking institutions have you covered for these situations as they always have the option of withdrawing the funds, but there are conditions.

Not managing to follow the agreement of not withdrawing money during the estimated time could make you pay a certain amount of funds due to breaking the agreement.

3.- WHAT KINDS OF RISKS ANYONE COULD FACE WHILE DEALING WITH CDS?

The first risk that always exists when dealing with a Certificate of Deposit is facing inflation. Not estimating the correct time of when the investment should be done could carry massive consequences to the point that you could even end up losing money. That is why it is extremely important to understand the market and see how is the world’s economy is performing before doing investments of any kind.

Also, there are some measures that should be clearly stated before opening a CD, and this will depend on the banking institution. First of all, you should make sure that every maturity data is clearly visible as well as any possible penalty that the user could receive if the funds are withdrawn earlier.

Finally, the banking institution should state when the interests will be paid. This is extremely important to have in mind as certain institutions work differently than others, some decide to pay the interest after six months and others might want to pay it on a monthly basis.

4.- ARE BANKING INSTITUTIONS THE ONLY ONES THAT CAN ISSUE CERTIFICATES OF DEPOSIT?

Even when the great majority of CDs are purchased directly from banking institutions, it does not means that many other groups can not offer this investment opportunity. Nowadays there are brokerage firms and independent salespeople that also offer their own CDs. These individual entities are also known as Deposit Brokers and they can be different from traditional banks by offering a higher rate of interest. This is mainly achieved by bringing multiple amounts of deposits into the institution,

However, the reason why these Deposit Brokers might never surpass banks is for security measures. It is extremely important to check the background of these groups before even thinking about investing in their offerings as everything could be part of a Ponzi scheme or a scam. Anybody could claim to be a Deposit Broker and then run with the money and never appear ever again.

That is why checking if these groups are affiliated with investment professionals is important, in this way it could be possible to check whether they are legit or if they are relatively suspicious.

CONCLUSION – ARE CDS GOOD ENOUGH TO CONSIDER?

Absolutely. They are safe and secure as these deposits will be one of the safest investments out there as they are in the same league (in terms of security) as saving accounts and money market accounts. Also, you will have guaranteed returns without any kind of monthly maintenance fee. However, you must make sure that the world’s economy and inflation are staying under control as they could become your worst enemy.