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Certificates of Deposit (CD's) Explained

Certificates of Deposit, which are usually referred to as just CD's, represent a kind of investment that has low level of risk and low returns as well. They are usually classified as one of the safest investment vehicles available on the market.

Even though their returns are significantly lower than those of other investment vehicles, their annual percentage yield (APY) is higher than that of savings accounts.

The bank will pay you higher interest on the money placed in a CD, because you make a commitment to leave the money with them for a particular time period. While your money is in the bank in the form of a CD, the bank is using it for investment purposes or to lend it to other clients. In return they pay you interest.

How to Invest in a Certificate of Deposit

The procedure surrounding the investment in a CD is not a complicated one. You should inform for your willingness to purchase a CD either your bank or the credit union. After this the bank or the credit union will provide you with a form with descriptive information. They will also move the money on your behalf to the CD. Your statement will display in a separate category the deposit you have made. No actual certificate is required.

In return to using your money, the bank will pay you interest. This money can be either withdrawn or reinvested in a new CD - it is up to you to decide. Typically, when the maturity date of the CD comes you will have a period of 10 to 15 days to take that decision.

If your major goal is to accumulate money, then it is recommendable to reinvest the proceeds and take advantage of the compounding interest. If you don't make any arrangements with the bank, usually it will automatically reinvest your money into a new CD.

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