One of the most common types of investments available is a certificate of deposit (CD). Most, if not all, banks and credit unions offer CDs in their range of savings/investment products. CDs are a great alternative to traditional savings accounts because the former typically allows investors to earn more from their money due to the comparatively higher interest rates. However, not everyone is familiar with how this type of investment works.
In this article, we hope to clear up some confusion as regards CDs by answering some of the most frequently asked questions about them. After having read this text, we recommend that you check out CIT Bank CD rates, which are among the top-rated choices for investing in CDs to date. CIT Bank offers its CDs with market-topping rates, and they also feature zero penalties for early withdrawals. Without further ado, let’s head to our list.
- Where does my money go?
The common understanding about CDs is that investors typically deposit a sum of money to the bank for a fixed period of time in exchange for having the right to receive the principal amount plus any interest earned at the date of maturity. However, the problem is that most people limit their understanding to this concept alone. Rarely do people pay attention to where their money goes and how it is used. Basically, since the bank will have full control over your money over the investment period, they can use it for various purposes, whatever may serve them best.
Commonly, the deposits will either be included in the revolving fund of the bank or will be used as capital for the bank’s investment programs. It is extremely rare that these deposits are left to stagnate in the cash vault of the bank, which is actually very counterproductive. Some banks include a statement that shows the process of how they will use and reallocate your funds in the certificate for increased transparency.
- Are CDs safe?
CDs are considered safe investments for two main reasons. First, they inherently feature a lower degree of risk. Unlike investing in shares of stocks, which are extremely unpredictable and volatile, CDs are relatively stable and monotonous. The interest rates attached to CDs are directly set by banks and credit unions, which means that these are not dependent on constantly-changing market trends. In this type of setup, the rates are going to be relatively even out across the board. This is why you typically see banks competing by the decimal on the interest rates that they offer.
The second and perhaps most significant reason why CDs are considered safe is that CD investments are insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC covers up to $250,000 per depositor per bank for CDs. Ultimately, this means that you can have the confidence to put in a relatively huge amount of money without having to worry about whether or not you can recover the amount in case things go completely south.
- For whom are CD investments better suited?
Like any other type of investment, CDs are best suited to a certain type of people with certain types of financial goals. Considering how CDs work, this type of investment is best suited to those who have excess cash that they don’t mind stashing away for a while. Apart from this, CDs are also a great choice for those individuals who are looking for a relatively safe type of investment. Finally, CDs are also suited to those who are looking for a simple way to invest. This is because CDs work somewhat passively in that you would only have to account for time when investing in CDs. This is in stark contrast with other types of investment, like shares of stocks which you would have to constantly monitor.