You can buy a certificate of deposit (CDs), a type of savings account that provides fixed income for a set period of time, at banks, credit unions, and online banks. You can also purchase a CD through the secondary market.
If you want to add these deposit accounts to your savings plan, it's important to know how to compare CD options. Learn more about where to buy a CD and how to compare their features.
Key Takeaways
- Certificates of deposit (CDs) are time deposit accounts that allow you to earn interest for a set maturity period.
- CDs can be purchased through financial institutions such as banks or credit unions or through the secondary market.
- When comparing CDs, consider the interest rate, minimum deposit requirements, and early withdrawal fees.
What Is a Certificate of Deposit?
A certificate of deposit is a time deposit account. When you open a certificate of deposit or CD, you fund it with an initial deposit. This money earns interest for a set time period, known as the maturity period. Maturity periods vary, typically from 30 days up to 10 years.
Once the CD matures, you have two options:
- Roll your initial deposit and the interest earned into a new CD
- Withdraw your initial deposit and the interest earned
A CD typically offers higher interest rates than you would find in a regular savings account or money market account. With traditional savings accounts, you can usually make withdrawals, but most CDs don't allow withdrawals prior to maturity without an early-withdrawal penalty.
Note
Your bank may automatically roll your existing CD into a new one at maturity unless you specifically indicate that you'd like to withdraw the money.
Brokered CDs vs. Bank CDs
Brokered CDs are similar to bank CDs in several ways. They both repay an investor’s principal with interest after a set time if the investor holds the CD until maturity. Both are FDIC-insured up to $250,000 per account.
Let’s look in more detail at the differences between brokered and bank CDs.
Brokered CDs
Unlike bank CDs, brokered CDs can be bought and sold on the secondary market, so they don’t have to be held until maturity.
Brokered CDs can be purchased or sold through a brokerage firm or independent salespeople, or purchased through multiple banks and held at one brokerage firm. Brokerages buy CDs from banks, then sell them to investors. A broker may be able to negotiate a higher interest rate from an institution if the broker can bring a certain amount of deposits to it.
If you have an account at a brokerage that offers brokered CDs, you can choose which ones to buy based on:
- Interest rate offered
- Maturity term
- Minimum deposit
For example, you could buy a 10-year brokered CD with a 2.4% rate with a minimum deposit of $1,000. You could hold onto it for the full 10-year term, or, since this is a brokered CD, you could sell it before maturity without triggering an early-withdrawal penalty.
Your brokerage may charge a commission fee each time you buy or sell a brokered CD.
Note
You can purchase "new issue" brokered CDs that are offered to investors for the first time, or existing brokered CDs that have previously been held by another investor. Your ability to turn and sell these CDs on the secondary market through your brokerage account can depend on demand.
The higher the demand for brokered CDs, the higher the price they might command when you're ready to sell. It's possible, however, that you may end up selling at a loss if the market for brokered CDs is thin at the time you need to sell. This can happen if rates for new CDs are higher than the rates on the CDs you're trying to sell. So it's important to consider the market risk you might be exposed to when trading brokered CDs.
Some brokerage firms will allow you to enroll in a program that automatically reinvests your principal once your CDs have matured.
Bank CDs
Bank CDs can be purchased from a bank or credit union, but you can't trade them the way you can trade a brokered CD.
Note
You won't pay a commission fee to buy bank CDs since you're not purchasing them through a broker. You'll need to meet the minimum deposit requirement for a bank CD, which can vary from bank to bank. Your money will earn interest according to the rates set by the bank.
Once you buy a bank CD, you own it until maturity. You can't sell it on the secondary market. If you need the money from the bank CD, you'll have to wait until it matures or you’ll have to pay the bank’s penalty for withdrawing funds early. Typically, this means forfeiting some or all of the interest earned.
Financial institutions offer CDs with varying features. These features may include:
- No-penalty CDs: These CDs allow you to withdraw money early without a penalty.
- Step-up CDs: A step-up CD offers the possibility for an interest rate increase over the course of the CD term.
- Bump-rate or bump-up CDs: With a bump-rate CD, you can choose to "bump up" your rate once during the maturity term.
- Add-on CDs: These CDs allow you to make additional deposits after opening your CD account.
- Jumbo CD: Jumbo CDs typically require a larger minimum deposit to open, but they can pay higher rates than standard CDs.
- High-yield CD: High-yield CDs are similar to high-yield savings accounts in that they can offer higher rates to savers.
Online banks tend to offer higher rates and lower fees on their CDs than traditional financial institutions.
What To Consider While Buying CDs
CDs are generally considered conservative investments that offer safety to investors. In addition to deciding where to buy a certificate of deposit, it's important to think about what type of CD option best meets your needs. So first, consider whether brokered CDs or bank CDs make more sense.
Brokered CDs can offer greater liquidity, flexibility, and potentially higher interest rates than bank CDs. However, some bank CDs may offer early-withdrawal options with higher interest rates or no penalties.
When you’re comparing CD options, consider the following:
- Interest rates
- Maturity terms
- Initial deposit requirements
Remember that with bank CDs, you don't generally have the option to cash them out before maturity without a penalty, so it's important to consider how soon you might need the money.
A CD laddering strategy can be useful to increase liquidity without withdrawal penalties. With CD laddering, you purchase multiple CDs with different maturity terms and interest rates. This way, you have CDs maturing at different times, and you can decide whether to cash them out or roll them over into new CDs.
How To Buy a Bank CD
If you're interested in buying a bank CD, the process is fairly straightforward. The first step is choosing which CD account or accounts you want to open. You may start by researching options at your own bank, perhaps with guidance from a financial advisor, then expand your search to compare CDs offered by other banks and credit unions.
Step 1: Choose a CD
The first step is selecting a CD that fits your needs. You may choose a standard CD account or CD with special features, depending on your goals and financial situation.
Step 2: Pick a CD Term
Choose a CD term. A longer term typically has a higher interest rate, but factor in how soon you'll need to access the money. Remember, you can also set up a CD ladder with varying terms for more flexibility.
Step 3: Open the CD Account
Opening a CD account is similar to opening any other type of bank account. If you're not an existing customer, you'll need to give the bank some basic information including your:
- Name
- Address
- Email address
- Phone number
- Date of birth
- Social Security number
If you have an account with the bank already, you may be able to open a CD through online or mobile banking. Navigate to the CD section of the banking menu, then choose the CD.
Step 4: Fund the CD
Funding your new CD is the last step. If you're opening a CD at your current bank, you can simply choose which bank account you want to use to fund the CD, then select a funding amount.
Note
If you're opening a CD with a new bank, you'll need to link an external account. This typically means sharing your bank account number and routing number, then choosing an initial deposit amount.
How To Buy a Brokered CD
Buying a brokered CD is similar to opening a bank CD, except you open an account through a brokerage. If you don't have a brokerage account, you'll need to open one before you can purchase a brokered CD. This usually involves filling out an account application, providing required documentation, and linking an external bank account.
Step 1: Log in to Your Brokerage Account
Once you have a brokerage account, you can log in and navigate to the section in your dashboard where you can buy and sell. Here, you'll choose CDs as the option you want to purchase.
Step 2: Compare CD Options
Your brokerage should provide you with a list of CDs you can buy. You can compare what's available from different banks, based on the interest rate, maturity term, and initial deposit required.
Step 3: Choose a CD
Select a brokered CD, your brokerage firm, and how much you want to invest.
Step 4: Review the Purchase and Submit
You should be taken to a final screen to confirm the details of your brokered CD purchase. If everything looks right, you can submit the order to complete the transaction.
The Bottom Line
CDs can help you achieve your savings goals. When deciding where to buy a certificate of deposit, it's helpful to understand the differences between brokered CDs and bank CDs. This way, you can choose a CD product that's suited to your needs and risk tolerance.
Frequently Asked Questions (FAQs)
Where is the best place to buy a certificate of deposit?
The best place to buy a certificate of deposit is from a reputable, established financial institution, brokerage firm, or individual broker. You’ll want to buy a CD that matches the terms you are looking for. For example, online banks can be a great option for finding the best CD rates if you don't mind not having branch banking access.
Why are CD rates so low?
CD rates are influenced by movements in the federal funds rate. When the Federal Reserve cuts interest rates, banks may follow suit and lower rates on CDs and other savings products. That means, however, that when the Fed raises rates, banks can, in turn, choose to offer higher rates to savers.
