When investing in certificates of deposit, 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
Let's briefly take a look bank CDs and brokerage CDs. They are very similar in a number of ways. For one, they both allow investors to place their funds with an issuing bank and interest is earned on their certificates of deposit at a specified rate, and over a specified length of time. They both carry FDIC insurance for anywhere up to $250,000 per financial institution (this limit was increased temporarily from $100,000 on certain types of deposits and is set to expire on December 31, 2009).
So when are we going to get to the differences, you ask? Okay, for one, brokerage CDs, are usually issued in large denominations that are then divided up by the brokerage firm into smaller denominations and are resold to their customers. Brokers act as sales representatives for banks - selling CDs on behalf of the banks. On the other hand, bank CDs are usually issued directly from the bank to customers who want to make one or just a couple of smaller investments on their own.
What Are Some Advantages of Brokerage CDs
There are benefits to taking either route when investing; however, some investors love the inherent advantages that brokerage CDs present. Here are a few:
- Higher interest rates. Because brokerage certificate of deposits are sold at a national level, competition is greater than Bank CDs that are sold at a local level - allowing 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 their policies.
- 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 certificates of deposit 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 the best investment tool for your portfolio.