Growing your money with CDs and brokered CDs

Explore the differences in these types of certificates of deposit

Imagine you found some magic soil that could make anything grow. If you planted a seed, you would know for sure that it would blossom. That’s sort of how certificates of deposit, also known as CDs, work. Think of your money as the seed and a CD as the magic soil. If you put your money in a CD, it’ll grow—guaranteed.

If you open a typical CD, you purchase it directly from a bank. With a brokered CD, a broker, who acts as a middleman, sells the CD to you.1 That’s the basics, but there’s plenty more to it.

What is a brokered CD?

A brokered CD is similar to a typical bank CD. Remember our metaphor from before? If you found the magic soil yourself, that would be like how a typical CD works—you pick it for yourself. If you had a gardener find the soil for you, that would be like a brokered CD—you have a broker find the CD for you.

Both bank CDs and brokered CDs are similar to savings accounts in that they’re a place where you can store your money until you need it. But with a CD, you agree not to touch it for a set time, or what’s called a term. The term could be six months, a year, two years or longer. In exchange for giving the bank or credit union your funds and not taking them out until the agreed-upon date, you earn an additional amount of money.1

How much you earn is based on your savings interest rate. This is additional money you get for keeping your funds in the account. For example, if you put $10,000 into a one-year CD with a 2% savings interest rate, once the year is up, you’ll have earned $200, and you’ll get back a total of $10,200.

Like any investment, there are possible advantages and disadvantages to brokered CDs.1 They may offer higher rates, a wider variety of options and make your money easier to access if you need it. But they may also be accompanied by fees or other rules.2

Another thing to keep in mind: Any person can claim to be a broker. “Deposit brokers are not licensed or certified, and no state or federal agency approves them,” according to the Securities and Exchange Commission. That means you’ll want to make sure you do your research to ensure they’re trustworthy.

Are brokered CDs safe?

As far as safe investments go, brokered CDs can provide steady growth just like traditional CDs. As long as you don't take your money out before the term is up, you shouldn't lose any money.

This potential growth is different from other types of investment options, like stocks, which are subject to risk, the possibility that the value of an investment could go down.4 Since CDs are not subject to the same risk, you don’t usually have to worry about your money not growing.1

But there are instances where CDs are callable, meaning the issuer or broker can pay them out before full interest is earned.3 CDs like this might be called if interest rates fall.

Are brokered CDs covered by FDIC?

While not all brokered CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to the allowable limits, some of them are. Check with your broker to be sure. The allowable limits change based on how much money and how many accounts you have with a certain bank.2 You can learn more about your coverage by talking to your broker or visiting the FDIC website.

With a brokered CD, you’ll want to be aware of characteristics that could be potential drawbacks:

  • Insurance risks: Whether or not a CD is insured can affect the savings interest rate. A CD that is not insured might have a higher rate but will carry more risk.2 If you are interested in keeping your cash in a CD that is insured, you could ask your broker to look for that kind of CD.
  • Fees: You may have to pay additional fees if you go with a brokered CD.2 Keep in mind, if the fee is high, it could impact your overall return and you might not make as much as you originally thought.

A brokered CD vs. a bank CD

Before you decide what type of CD is right for you, compare the basics of brokered CDs and bank CDs to see what will best fit your life:

Bank CD

  1. You open it on your own, from a bank.
  2. You can make sure the CD is insured by doing research with your bank.
  3. The options available will be in one place.
  4. You likely won’t have to pay someone else a fee to open the account.

Brokered CD

  1. Someone else opens it for you.
  2. You can ask the broker to make sure the CD is FDIC-insured.
  3. The options available can come from multiple banks or financial companies.
  4. You may have to pay someone to open the account.

A CD offers a safe chance for your money to grow.1 No matter if you pick out your CD on your own or use a broker to find the best option, you may be able to watch your funds bloom where they are planted.

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