Understanding the concept of a brokered certificate deposit
Certificates of deposits are investment instruments which can provide you substantial and at the same time, reliable returns on your investments. It is a lot better than investing in the stock market. It basically gives you a lot of peace of mind compared to other investment methods. The savings bank account is the best of the lot, but your certificate of deposit will offer you better returns on the same.
Conventional CD’s are those that allow you to make a lump sum investment for a long term. This term can be anywhere above a year in duration. It can easily be converted to cash and the rate of return is definitely higher than a savings bank account. The bank which issues such a CD will give you the entire principal along with the interest accrued after the CD matures. But you will obviously have to pay a penalty if you wish to withdraw your funds earlier.
But CD’s offered by brokers promise more interest than a conventional CD. They also offer more flexible terms compared to conventional CD’s with maturity periods ranging from 6 months to almost 20 years at a time. And besides all this, you also have the option of selling the CD in the secondary market before it matures. And thus the liquidity of the investment instrument is higher than a conventional CD.
The first thing to do before going for such a CD is to know everything about your broker. If you are investing anything over $250000 in CD’s, then you are not covered for the excess amount by the FDIC. And hence you will end up losing the same. If you investing anywhere above $250000, make sure you find out everything about the reputation of your broker.
You will also need to find out whether you will be able to sell the CD on the secondary market. A few CD’s are issued with the name of the buyer on them. If this is the case, the person who buys the CD from you will have to get you to sign off on it when he withdraws the cash after it matures. This is cumbersome and highly improbable except for transactions made within the family.
Look for added features on your CD like the survivors option. This will allow the next of kin to trade the CD in the secondary market as soon as the demise of the CD holder has been established. They will also have the option of redeeming the CD with the bank itself in certain cases.
Brokered certificates of deposits are the best thing to go with if you know your broker well. If you have been dealing with him for quite some time, then you can be rest assured that you will get a good deal and he will not cheat you. Depending on how well you know your broker, you may either end up shelling out a lot lesser or a lot higher on your certificate of deposit when compared to a conventional CD.
