CDs (Certificates of Deposit) offer a safe and secure way to invest money. Unlike stocks or mutual funds, CDs are not subject to market fluctuations and are insured by the FDIC (Federal Deposit Insurance Corporation) up to $250,000 per account. CDs are also a good option for people who want to save money for a specific goal, such as a down payment on a house or a child’s college education. By investing in a CD with a specific maturity date, you can ensure that the money will be available when you need it.
Most people are familiar with bank CDs, typically offered by large banks such as Bank of America and JP Morgan Chase. But you may be unfamiliar with their bigger and better counterpart: the brokered CD. In this article, we’ll explain the differences between these two types of CDs.
Overview of the differences between Bank CDs vs. Brokered CDs
There are a few differences between bank and brokered CDs. Both bank CDs and brokered CDs are investments with a fixed interest rate and maturity date, but bank CDs are purchased directly through a financial institution and the funds are insured by the FDIC. On the other hand, brokered CDs are CDs bought through a brokerage firm. Brokered CDs generally offer higher interest rates.
Here is a list of key differences between the two types.
- Issuer: Bank CDs are issued by banks, whereas brokered CDs are issued by brokerage firms who purchase the CDs from banks and then sell them to investors.
- Interest Rate: Bank CDs typically have lower interest rates than brokered CDs because they are only available to customers of that particular bank. Brokered CDs, on the other hand, offer higher interest rates because brokerage firms negotiate better CD rates with banks and then pass on some of the interest to investors.
- Liquidity: Bank CDs often have early withdrawal penalties if the investor needs to access their funds before the CD matures. However, brokered CDs can be sold in the secondary market before they mature. Brokered CDs are basically tradeable versions of bank CDs.
- FDIC Insurance: Bank CDs are FDIC-insured up to $250,000 per depositor per bank, which means that if the bank fails, the government will reimburse the depositor up to the insured amount. Brokered CDs are almost always FDIC-insured, but it’s worth checking the issuing bank.
Benefits of Bank CDs
Bank certificates of deposit (CDs) are a reliable investment option for individuals who want to earn a stable rate of return on their savings while maintaining short-term access to cash. CDs are a great way to diversify your investment portfolio and minimize risk, while still earning a higher interest rate than traditional savings accounts. Here are some of the benefits of investing in bank CDs:
- Higher Interest Rates: Bank CDs offer higher interest rates than traditional savings accounts. This means that you can earn more money on your savings over time. The interest rates on CDs are fixed, which means that they do not fluctuate with market conditions. This makes them a great option for individuals who want a predictable and stable return on their investment.
- FDIC Insurance: Bank CDs are backed by the Federal Deposit Insurance Corporation (FDIC), which provides insurance coverage for up to $250,000 per depositor, per bank. This means that your investment is protected against bank failures. FDIC insurance coverage provides peace of mind and ensures that your investment is safe and secure.
- No Market Risk: Bank CDs are not subject to market risk, which means that the interest rate and principal amount are guaranteed. This makes them a great option for individuals who want to minimize risk and avoid market fluctuations.
In summary, bank CDs offer several benefits, including higher interest rates than traditional savings accounts, FDIC insurance coverage for protection against bank failures, and flexible terms and conditions that allow investors to choose the length of their investment.
Benefits of Brokered CDs
Brokered CDs are certificates of deposit that are sold by brokers instead of being purchased directly from a bank. They are very similar to bank CDs other than the fact that brokered CDs are tradeable securities.
Here are some benefits of investing in brokered CDs:
- Higher rates of interest: Brokered CDs usually offer higher interest rates than traditional CDs, which means that your money will grow faster. For example, the brokerage firm Merrill Edge offers higher CD rates compared to Bank of America CDs. Bank of America owns Merrill Edge.
- Diversification: Brokered CDs offer a wide range of maturity options, which allows investors to diversify their investment portfolio and manage their risk more effectively.
- Accessibility: Brokered CDs are easily accessible through online brokerage accounts, which makes it easy for investors to buy and sell them.
- FDIC insurance: Brokered CDs can also be FDIC-insured just like traditional CDs, which means that investors are protected against losses in case the issuing bank fails.
- Liquidity: Brokered CDs can also provide investors with greater liquidity than traditional CDs, as they can be bought and sold on the secondary market.
Brokered CDs offer investors higher interest rates, diversification, accessibility, FDIC insurance, liquidity, and flexibility. However, investors should also be aware of the risks associated with brokered CDs, such as interest rate, reinvestment, and credit risk, compared to investing in bank CDs.
Summary of Choosing Bank CDs vs. Brokered CDs
To summarize, bank CDs and brokered CDs are both cash investments that pay a fixed interest rate over a specific period. Both CD types are generally used to earn more money from your cash.
Bank CDs are issued by banks, have lower interest rates, and offer less flexibility in terms of liquidity. They are FDIC-insured up to $250,000 per depositor per bank. Brokered CDs are issued by brokerage firms, have higher interest rates, and are more flexible in terms of liquidity. They may or may not be FDIC-insured depending on the issuing bank, but typically are on almost every brokerage we’ve evaluated.
Investors will typically choose brokered CDs over bank CDs if they seek higher interest rates, diversification, accessibility, FDIC insurance, liquidity, and flexibility. Brokered CDs offer a wide range of maturity options and can be easily bought and sold on the secondary market. However, investors should also be aware of the risks associated with brokered CDs, such as interest rate risk, reinvestment risk, and credit risk.
