eHow launches Android app: Get the best of eHow on the go.

How To

How to Purchase a CD

Contributor
By eHow Contributing Writer
(4 Ratings)

Certificates of deposit (CDs) lock up your money for a period of time, usually at a fixed rate of interest. They generally have lower interest rates than other investments, but have the advantage of FDIC insurance in most cases. Banks and brokerage firms sell them for periods of 14 days to five years.

Difficulty: Easy
Instructions
  1. Step 1

    Determine how much you want to invest in a certificate of deposit.

  2. Step 2

    Decide how long you can afford to tie up the money, since banks charge penalties for early withdrawal.

  3. Step 3

    Shop for the best yields, which you can find online for banks nationwide. Bankrate.com, for example, lists banks that offer the most beneficial deals.

  4. Step 4

    Select the bank in which you wish to make the deposit and call it. Verify the yield and ask for information about additional terms such as penalties for early withdrawal.

  5. Step 5

    Ask if you can invest by mail. Most banks will allow you to send a check in the amount of the deposit so that you don't have to go in person. You might need to fill out an application form if you don't already have an account at the bank.

  6. Step 6

    Send in the application form along with your check.

  7. Step 7

    Make sure you get a statement within a week or two confirming the deposit.

Tips & Warnings
  • The highest interest rate doesn't always result in the highest yield. Yields increase with the frequency of compounding. When shopping for a CD, compare yields, not interest rates.
  • The interest earned on a CD is taxable each year even if you have not withdrawn the interest or principal. (If the CD is in a retirement account such as an IRA, however, the interest isn't taxed until withdrawn.)
  • If you deposit a certain amount of money into a CD, the bank will sometimes provide you with free checking.
  • There is generally a big penalty for early withdrawal if you cash in all or part of your CD early.
  • The FDIC insures a maximum of $100,000 per account. This means that, if you have a one-year CD, it must be less than about $95,000 because the interest it earns will put it over the $100,000 mark.
  • Beware: if you find a CD with an unusually high rate of return, it might not be FDIC-insured.
Subscribe

Post a Comment

Post a Comment

eHow Article: How to Purchase a CD

Related Ads

  • Have you done this? Click here to let us know.
I Did This
Get Free Personal Finance Newsletters

Copyright © 1999-2009 eHow, Inc. Use of this web site constitutes acceptance of the eHow Terms of Use and Privacy Policy.   en-US Portions of this page are modifications based on work created and shared by Google and used according to terms described in the Creative Commons 3.0 Attribution License.

eHow Personal Finance
eHow_eHow Business and Finance