Difference Between an Online Certificate of Deposit and Regular CD
Certificates of deposit (CDs) are bank savings instruments. These instruments are deposited for a designated period of time and given a guaranteed rate of return if consumers hold the CD for the full term. A penalty is paid if the CD is "broken" or taken out early. Consumers can buy CDs directly from a bank or through online services.
Other People Are Reading
-
Basic CD Principles
-
All CDs, whether bought at a bank or online, work on the same principle. Money is put in for a selected term and collects interest. Term timeframes can be one-, three-, six-, nine-, 12- and 24-month durations. If a consumer purchases a one-year CD and then needs the money in eight months, there is a penalty to take the money out. All of these terms are disclosed on the CD certificate. If the CD is offered by a member FDIC bank, there is up to $250,000 of federal insurance on the consumer's total bank assets, protecting his investment in the event the bank becomes insolvent.
Buying Online
-
There are two types of CDs a consumer can purchase online. The first is a regular CD through a bank's online services. These CDs are exactly the same as those you would find if you walked into a local bank. The second type of CD that can be bought online is through a deposit broker and is referred to as a brokered CD.
-
Brokered CDs
-
Brokered CDs are bank CDs sold on the secondary market similar to a bond. You may pay a nominal fee to purchase a CD through a brokerage firm. It is important to fully understand how the deposit broker is structured and where the CD is coming from. Brokerage firms offer brokered CDs, but there is no regulation regarding who can claim to be a deposit broker. For that reason, the Securities and Exchange Commission recommends asking for all state and federal licensing to see if the financial institution is valid before making a CD purchase. Consumers purchase brokered CDs because they offer higher interest rates than local banks. Keep in mind that the FDIC insurance is limited to $250,000 per person per bank; so if you already have a CD or other assets at a bank, you may put assets at risk if the bank becomes insolvent.
Liquidity
-
Every CD has a term. If you cut that term short, you pay a penalty. There is a slightly different approach to liquidating a brokered CD on the secondary market because you are selling it to another party instead of liquidating it with the bank. Like a bond, if interest rates go up during the CD's term, its value drops to reflect a real-time value. If interest rates drop, your CD increases in value. If you sell a $10,000 CD when rates go up, you will get less than $10,000, though this isn't a penalty. If you sell when rates go down, you can actually get more than $10,000. It all depends on the market.
-
