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These are, basically, a bank account that charges you to withdraw funds.

 

You deposit money and the bank will guarantee you a specified interest rate, this enables the bank to better predict what will be left in the account.

 

For you, this means you will get a higher interest rate then savings account while still having funds guaranteed.

 

Keep in mind that inflations averages around 3% per year (when the economy is working properly) so locking money up in a CD could result in buying power losses.

 

These are similar to bonds, but bonds typically have much higher interest rates. The large difference is that you can withdraw funds from a CD whereas with bonds you are locked in. An alternative is a Bond ETF, which has great liquidity but may loose value in the short term.

What are Certificates of Deposit and how do they work?

 

CDs for beginners:

 

Article by Jacob K Lloyd

Jacob@startingwithstocks.com

Published: 22 Aug 2015

Last updated: 22 Aug 2015

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