Why Certificates of Deposit are a Safe Investment
When it comes to your investments you are going to want to have a portfolio that is well balanced. Some of your money should be in high growth investments but you also want to have some of your money in a safe place. Certificates of deposit are one of the best investments for the money you are trying to keep safe since there is very little risk and a decent interest rate.
The main reason that certificates of deposit are considered to be a safe investment is that you are basically loaning money to the bank. In reality this is no different than if you opened a savings account. The only thing that differentiates the two is that a certificate of deposit is for a specified time period, ranging from six months to five years. You can't withdraw your money during this time and at the end of it the bank will pay you the full amount. The bank guarantees your money so they are actually the ones taking the risk.
Since the bank guarantees your deposit the only real risk is if the bank were to fail. Fortunately you are covered on this as well. A certificate of deposit is insured by the Federal Deposit Insurance Corporation. That means that if the bank fails you will still get your money back. This program was instituted in order to help instill confidence in the banking industry and it effectively amounts to the federal government guaranteeing your money. Since the risk of the government defaulting on its payments is incredibly low there is basically no risk involved.
One thing to keep in mind about certificates of deposit is that even though there is no risk of losing your money there are some risks that you should think about. The biggest of these is interest rate risk. If you invest in a five year certificate and interest rates rise dramatically you are losing money because you are locked into an investment when you could be getting a better return elsewhere. This is why longer investments will pay higher interest rates, to reduce the risk. This is not a huge risk but it is something to think about when examining certificate of deposit benefits. Since this part of your portfolio is mainly intended to be a safe place to put your money not a place to look for strong growth you needn't be too concerned about rising interest rates.
Because a certificate of deposit is one of the safest investments that you can find the only thing that you really need to look at when you are choosing one is the length of the deposit and the interest that is being paid. In almost all cases the longer the deposit the higher the interest. You are going to have to decide how long you are willing to tie your money up so that you can get a higher interest rate.