Are short term CD’s better than other investment plans?

Understanding the certificate of deposits is very important to make wise investment decisions. Making the most of investments depend upon what kind of CD is chosen and the condition of market when the investment was made.

The time period for which the certificate of deposit is locked also determines the profit or loss that the investor made during the investment. The time period is nothing but the time for which the investment is held in the bank and the investor receives an interest rate for the amount invested. This interest rate rules the roost in determining which CD is better and which is not. Interest rates fluctuate throughout the investment time period. This is the main reason the short term CDs are preferred more than the long term investment options.

If the interest rates are not at an all time high, then the best step to take while investing is to put the money into a short term investment plan. A short term CD lasts typically for a year, and can be reinvested upon maturity. This works the best when the interest rates are gradually rising in the market. When an investor locks the amount in the CD for a year, for example, then the interest rate at which the CD was bought holds good for the entire year. The investor will not be able to make the most of the rising interest rates until the CD matures and the investor gets the money to reinvest into better paying CDs. Short term CD lets the investor take the benefit of rising interest rates by letting him reinvest the money after a short period of time. The CD lasting for anywhere between six to twelve months falls under short term CDs. When the interest rates are gradually rising, in all probabilities, there will be an all time high interest rate in less than a year in the market. The short term CD which matures can then be reinvested as a long term CD, to get the best of the high interest rate period.

If the interest rates are already at an all time high, then it is a better idea to invest in a long term CD, so that the investor can make use of the high interest rate period for as long as possible. But if it is a callable CD, then the bank will reserve the right to call the CD back if the interest rates rise further. In such cases too, it is better to invest in short term CDs and reinvest when the time is right.