Hello, and welcome to our help page. This site was put together to help
the newbie investor to obtain the help they need. We will discuss the
most basic components of investing on this page. There are several
other websites that we recommend for the more advanced investor. They
are
http://moneycentral.msn.com/investor/home.asp
http://www.better-investing.org
http://www.investorwords.com/
http://www.investorguide.com/
As for our help content, here we go...
Q: WHAT IS A CD?
A: CD is short for Certificate of Deposit. A CD is a time deposit with a bank. Time deposits may not be withdrawn on demand like a check account. CDs are generally issued by commercial banks but they can be bought through brokerages. They bear a specific maturity date from three to five years, a specified interest rate, and can be issued in any denomination, very similar to bonds.
CDs offer a slightly higher yield than T-Bills because of the slightly higher defaul risk for a bank, but overall the likeliness of a large bank going broke is pretty slim. Of course, the amount of interest you earn depends on a number of factors such as the current interest rate environment, how much money you invest, the length of time, and your specific bank. While nearly every bank offers CDs, the rates are rarely competitive, so it's important to shop around.
An important concept to understand when buying a CD is the difference between annual percentage yield and annual percentage rate. APY is the total amount of interest you earn in one year taking into account compound interest. APR is the total amount of interest you earn in one year taking into account compound interest. It is simply the stated interest you earn in a year, without taking into account compounding.
The main advantage of CDs is their safety and knowing the return you'll recieve. You'll earn more than in a savings account, and you won't be at the mercy of the stock market. Plus, in the U.S. the FDIC guarantees your investment up to $100,000. Along with advantages come disadvantages. There are two main disadvantages. The returns are paltry and your money is tied up for the length of the CD. You can't get your money out without paying a harsh penalty.
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