Benefits and Risks Associated with Brokered CDs

As the name suggests, brokered CDs are acquired through a brokerage firm or a sales representative but not directly from the issuing bank. This means that the financial advisor, or the broker, surveys the marketplace to determine the best CD rates available. Just like any other CDs, you will agree to deposit the money for a specified term, and the bank will pay you an agreed amount of interest. Before you invest your money in this type of CD, you should first understand the benefits and risks involved in this investment.

The main benefit of brokered CDs is that it gives you the chance to open your investment opportunities to a wide universe of banks. This is because you can easily buy CDs from across the nation without the hustle of opening accounts with the individual banks. This can be especially helpful if banks that are outside your home area are offering higher rates.

As mentioned above, you can buy CDs from various banks under one account, you brokerage account. This feature can be very helpful simplifying your record keeping. You also get access to a variety of maturities from numerous banks, which often pay better than the standard rates. In addition, buying FDIC-insured CDs from numerous banks boosts your coverage especially if you run the risk of exceeding the present $250,000 cap.

Another benefit is that if you need to withdraw your money before the maturity date, you can sell your brokered CDs on the secondary market. This will help you avoid the early withdrawal penalties often incurred if you had bought the CD directly from the bank.

On the downside, brokered CDs are often subjected to market risks. This is the risk that you might sell your CDs in the secondary market for a lower price than you paid. If the interest rates rise, buyers in the secondary market may decline to pay the face value of your CDs to help you out. Ideally, this risk can be easily eliminated by keeping the CD until it matures. However, due to the uncertainty of life, you may need to change plans and withdraw your money before maturity.

In addition to market risks, there is also the risk of loosing all your money. You may find very attractive CD rates that are much higher than other banks but need you to assume more risks. To minimize this risk, you need to be cautious where you buy the CD. You should probably stick with the well-known firms and do business only with those banks that are safe and FDIC-insured.

Generally, brokered CDs give you an easy route to buy CDs from across the country without having to open accounts with the individual banks. With these CDs, you may be able to enjoy benefits such as diversified investments, simplified record keeping, and a secondary market just in case you need to cash in your CD before maturity. However, like all other investments, there is no 100% assurance. You will need to take measures to avoid the risks mentioned above.

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