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Not All CDs Are Created Equal

Many people do not know that there are two distinct types of certificates of deposit (“CDs”): traditional CDs that are purchased from a bank and brokered CDs. Brokered CDs are offered by stockbrokers or other investment professionals who act as a deposit broker for the issuing bank. Brokered CDs may be considered securities and carry more risk.

Unlike traditional CDs, not all brokered CDs are FDIC insured. Brokered CDs also differ from their traditional brethren in the following ways: a purchaser may have to pay a fee to buy a brokered CD; a minimum investment may be required; and brokered CDs can’t simply be cashed in with the issuing bank. Some firms that offer brokered CDs maintain a limited secondary market. If a brokered CD is liquidated before maturity, the purchaser may be subject to market risk, resulting in the CD being worth less than what was originally invested. Some brokered CDs may also differ from traditional CDs, in that, they have a variable interest rate.

Before you purchase any CD, you should get answers to the following questions:

  • Is it a bank product or a security?
  • Who is the issuing bank?
  • Is there a purchase fee?
  • What interest rate does it pay?
  • Is the interest rate fixed or variable?
  • When does it mature?
  • What are the penalties for early withdrawal?
  • Can the bank call the CD?
  • Is the issuing bank FDIC insured?
  • Is the deposit broker reputable? Check FINRA BrokerCheck here to verify his or her credentials.

CDs may be useful additions to your investment portfolio, but know the facts before you invest.