Tips for investing in CDs

Many people who look to invest can do so in a number of ways. Stocks, bonds, deposits, and mutual funds are just a few of many ways one can invest.

Another way you can invest is through CDs, or cash deposits. A CD is a common type of fixed income investment that will pay a higher yield than a liquid savings account.

What is a CD?
A CD, or cash deposit, is offered through banks. With a CD, you give the bank a fixed amount of money, which they retain for a certain amount of time. This amount of time varies but typically goes from a few months to a few years. In return, the bank guarantees a fixed interest rate on that money for the duration of the terms. At the end of that period of time, you get your principle plus the interest back.

Tips for investing in CDs
Like every other investment strategy, there are risks involved with investing in CDs. The following are some tips for investing in CDs.

? Get the maturity date in writing. Believe it or not, there are a number of investors who fail to get the maturity date of their CD in writing or to even confirm how long it is. As a result, they may find themselves with thousands of dollars invested that they can't touch for 5 or 10 or more years. This is very basic and is the first thing you should look into when investing in a cash deposit.
? Confirm the CDs interest rate and find out how you will be paid. Cash deposits offer higher interest rates than liquid savings bonds, which is why they are a popular investment choice. Make sure you confirm the interest rate, in writing, before committing to a CD. This is just as important as finding when the CD matures. Make sure you find out how the bank pays interest as well, and see if you have any options. Some banks pay monthly, some semi-monthly, and some transfer it in a lump sum at the end of the term.
? Find out if the interest rate will change. Variable rate CDs are one type of cash deposit in which the rate chances. Know before you invest how and when this will happen. Sometimes, it is through a pre-set schedule, while other times it depends on the performance of certain markets.
? Know the call features. With a callable cash deposit, a call feature is when the bank in which you have invested your money exercises the right to end the CD after a certain amount of time. However, you don't have this same right, meaning you can't just pull your money out at any point without a steep penalty. In the event the bank calls your CD, you should be getting your original deposit, in full, as well as any unpaid interest up until that point. Keep in mind that call features are different from a CD's maturity. Discuss these differences with your bank or broker so there is no confusion.

A cash deposit can be a good way to invest a set amount of money and then get a good return on it by doing nothing but allowing it to sit and accrue interest. However, like all investments, it is important to understand the risks and do the right research before investing.