Advantages of Brokerage CDs

When investing in certificates of deposit (CDs), it is often difficult to choose between those offered by banks and brokerages. Many believe that brokerage CDs offer significant benefits that cannot be found with bank CDs. To determine the difference between the two, let’s look more closely at what they are and what they offer.

Bank CDs vs. Brokerage CDs

Bank CDs and brokerage CDs are very similar in a number of ways. First, they both allow investors to deposit their funds with an issuing bank – and interest is earned on the certificate of deposit at a specified rate over a predetermined length of time. They both carry FDIC insurance up to $250,000 per depositor, per financial institution.

As for differences, brokerage CDs are usually issued in large denominations that are then divided up by the brokerage firm into smaller pieces and resold to their customers. Brokers act as sales representatives for banks – selling CDs on behalf of the banks. Bank CDs, On the other hand, are usually issued directly from the bank to customers who want to make one or just a couple of smaller investments on their own.

Advantages of Brokerage CDs

There are several benefits to taking either route when investing, though some investors love the specific advantages of brokerage CDs. Here are a few:

• Higher Interest Rates
  Because brokerage certificates of deposit are sold at a national level, competition is greater than bank CDs sold at a local level. This allows for competitive interest rates. However, the change in interest rates will make the value of the CDs fluctuate as well.
• Fewer or No Fees
  The CDs are broker-managed, thus it is possible they can offer either lower fees or no fees, depending on the policy.
• Liquid Funds
  Since brokerage CDs can be resold before their maturity date, you can withdraw your money without any penalties. However, doing this may result in your CD being worth more or less than what you paid for it, depending on the maturity date.
• Convenience
  You can buy CDs from multiple banks through one brokerage firm. But because they come from separate banks, you can utilize the full FDIC insurance for each CD.

Brokerage CDs clearly come with a myriad of advantages. But before you commit, it’s good to conduct thorough research so that you can decide if they fit into your portfolio.