Certificates of deposits are one key way that an investor can diversify his or her portfolio. CDs are defined as a specific type of deposit account with a thrift establishment or bank that offers a higher interest rate than that of the normal savings account. This investment type is FDIC insured. Below are examples of how CDs work, different types of CDs, and the benefits of adding CDs to your portfolio.

How do CDs Work?

CDs are pretty easy to understand. When an investor purchases a CD, he or she is investing a specific, fixed sum for a certain period of time. This period of time could be from six months to more than five years. The bank pays interest on cash in the CD. This interest is paid at regular intervals in most situations. At the end of the allotted time frame, the investor can redeem the CD and get back what he or she put in as well as any interest accumulated. Investors need to be careful because taking out the money before the CD has a time to grow can result in an early withdrawal charge.

Types of CDs

There are several different types of CDs out there. Finance Factors is an example of a company that offers several different CD types for their clients to choose from. For example, Incentive Time Certificates require at least $500 to open an account. Heritage Time Certificates are specifically offered at special rates to investors who are 55 years old and over. There are also Callable CDs, Jumbo Time CDs, TradeUp CDs, and Variable Jumbo Time CDs.

Why Choose a CD?

CDs are an excellent way to make your money grow without virtually any risk. Because your funds are FDIC insured, you are guaranteed to at least have the money you put into the account left after the fund matures. The only drawback is that this growth is often not a fast growth and may not be a large growth. Still, adding CDs to a diverse portfolio can help maintain balance and financial security.