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Disadvantages of Certificates of Deposit (CD's)

Certificates of deposits (CD's) provide investors with many advantages in terms of low risk levels. However, they have their negative sides, which are the topic of this article.

CD's have a maturity date after which you can take your money. When you put your money in them and you need to make a withdrawal before this date you may be penalized with a fee. So, in order to see whether you are subject to such penalties and the corresponding amounts you should call your bank.

Another negative side of CD's is that they come at lower returns than the other investment vehicles. However, this is compensated by the lower risk levels. This means that CD's are exposed to a less degree to such risks as loss of money. Only if the particular banking system fails the investor in a CD can lose his/her hard earned money.

Nevertheless, the risk related to losing one's purchasing power when investing in a CD exists. This is due to the long-term orientation of this kind of investment.

Another thing that you should verify is whether the bank from which you have purchased the CD is insured with FDIC. Visit the database of FDIC, which includes the names of all financial institutions that are insured. 

Credit unions are insured by the NCUA. They are not FDIC insured, thus you will not be able to find them in the institution's database. However, both insurances hold almost the same qualities.

Finally, it is recommendable that you thoroughly analyze the risks and other aspects of CD's before investing in them. Study also the additional available alternatives you have for investing.

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