How to Invest in a CD

Usually featuring a fixed interest rate, a certificate of deposit is a popular investment product that lets you set aside an amount of money for a specific period of time and get your principal plus interest payments upon redemption. While less flexible than alternatives like money market accounts or a regular savings or checking account, a CD can be a good option for goals such as an emergency fund or down payment. But before choosing CD investments, you’ll want to learn how CDs work, which options you have and what the account opening process involves.

If you don’t mind making a fixed deposit that will be held through the maturity date, CDs offer several benefits that make them appealing.

Unlike stocks and bonds, CDs come with low risk since you usually don’t have to worry about losing your principal. The Consumer Financial Protection Bureau mentions up to ​$250,000​ of your funds are protected as long as you use an insured bank or credit union. In addition, the Federal Deposit Insurance Corporation shows that some CDs pay higher interest rates than comparative low-risk savings products, and the interest is usually predictable.

At the same time, you should be aware that CDs have some limitations such as early withdrawal penalties if you need the money before the term runs out. The issuing bank can also set requirements like a minimum deposit amount. Lastly, interest rates vary for short-term versus long-term CD options at different financial institutions, and they may be too low to help you beat inflation.

While less flexible than alternatives like money market accounts or a regular savings or checking account, a CD can be a good option for goals such as an emergency fund or down payment.

If CDs sound right for you, consider the various types available. For example, traditional CDs are most common, but you can find high-yield CDs offering better rates, bump-up CDs featuring interest rate increases and liquid CDs allowing for penalty-free early withdrawals. Investor.gov also highlights brokered CDs you can get from brokerage firms that come with higher risk but also possibly higher gains.

You can opt for an individual CD or spread your money out using a CD ladder or barbell strategy. According to Fidelity, a sample CD ladder might feature five CDs with equal deposits and staggered maturity dates of ​one to five years​. A CD barbell, on the other hand, can involve splitting your money between short-term and long-term CDs. In either case, you can benefit from higher interest rates with longer-term CDs but retain some liquidity with shorter-term CDs.

You can research financial institutions to see available CD options as well as meet with a financial advisor for recommendations on strategies for your financial planning needs.

Before opening this type of savings account, you'll need to select the appropriate CD type and look for institutions offering the best CD rates. You’ll see the interest rate stated as the annual percentage yield (APY). It can vary depending on the term length, CD type, issuer, amount invested and other factors, explains Discover.

While researching, also pay attention to minimum deposit amounts, term length options and early withdrawal penalty conditions. In addition, consider protection such as using an FDIC-insured bank to save your money.

You can then start the CD application online or at a local financial institution. Centier Bank shows that the process is much like opening a regular bank account. You’ll provide your basic financial and personal information, fund the account with a check, cash or bank transfer, and sign some documents. Once your account is open and funded, interest will start to accrue depending on the bank’s terms. You can usually monitor the account online.

In most cases, you can simply leave your CD funds alone and then get the cash and interest back at maturity. Your financial institution usually doesn’t allow for any additional deposits during the term unless you have an add-on CD, but you can usually make withdrawals early as long as you’re willing to pay a penalty. The CFPB notes you have multiple options when the maturity date arrives such as renewing the CD, rolling over the funds or making other changes to the account.