Certificates of Deposit (CDs)

CROWD IN FRONT OF THE NEW YORK STOCK EXCHANGE

CROWD IN FRONT OF THE NEW YORK STOCK EXCHANGE

Certificates of deposit, or CDs as they are commonly known, are small loans investors make to banks for a few months to several years. The amount of money loaned is usually called the principal of the loan. The amount of time for which the loan is made is usually known as the maturity or term of the loan.

CDs are insured by a government insurance agency called the Federal Deposit Insurance Corporation. The minimum investment balance is usually a few hundred dollars and can be as high as several hundred thousand dollars for some “jumbo” CDs. Needless to say, the interest rates you will receive on CDs are small, but they are usually better than interest rates on regular saving accounts and depend on the level of inflation and the condition of the economy in general.

When CDs mature (i.e., the bank has to give you back your principal), you usually have the option of reinvesting in other CDs. Ask your parents about purchasing CDs in the bank they use for their own finances.