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When individuals invest in certificates of deposit, the question of how fees and even commissions affect the rate of return often comes up. In some instances, there are no commissions to consider, but often times, there are. They are most common in brokerage CDs, which is why its important to learn about them before investing.

What You Should Know About Brokerage CDs

There are some significant differences between brokerage CDs and those offered solely through banking institutions. One difference is that these certificates of deposit, while being offered through banking institutions, are not actually representative of the bank. Instead, the broker firm is purchasing them from the banks in large denominations and reselling them to customers in smaller chunks. Taking this route makes it possible for the broker to offer a higher interest rate to customers. Also, because the CDs can be resold before the maturation period ends, customers can take advantage of brokerage CDs due to greater liquidity.

What about Those Commissions for Brokers?

With the benefits that come with brokerage CDs, you're probably wondering what the firm gets out of the deal. One benefit for them is that there may be commissions for brokers. This often occurs because broker firms don't actually issue certificates of deposit; instead, they "broker" them, meaning any CD purchased through them is actually traded like a bond, thus entitling them to commission.

While the commissions for brokers often don't affect you, sometimes they can. This is especially true for your yield to maturity (YTM), which is the rate of return anticipated if the CD is held until the maturity date. Because of commission, you may be paid the predetermined amount of interest promised at first investment; however, your YTM could be materially lower.

When deciding whether to go with the traditional CD or brokerage CDs, every aspect should be taken into account including commissions for brokers. So before you make any investments in certificates of deposit, it's good to first determine all aspects that can affect the possibility of the greatest rate of return.

Investing in a certificate of deposit can come in more than one form; some take advantage of traditional bank CDs, while others would rather invest in a brokerage CD. So what is the brokerage CD and what makes it unique in investing? Let's take a closer look at just what this type of CD is, and how you can possibly get the best CD rates on the market.

What is a Brokerage CD?

A brokerage CD is one of many types of certificates of deposit that allow you to invest your money with the understanding that you will receive a financial gain over time based on a predetermined interest rate. However, this specific type of CD is slightly different than those that are considered bank CDs because they are offered through a brokerage firm, even though they're issued through a bank. Also, the brokerage firm usually purchase their certificates of deposit in bulk then resells them in smaller denominations to customers.

Some similarities that you'll notice between the traditional CD and brokerage CD is that they are both typically FDIC insured, predetermined interest is earned on both, and they both yield the best CD rates returns over a longer period of time.

How Can You Benefit from a Brokerage CD?

Now, let's look at some differences that make the brokerage CD unique and advantageous:

• Liquidity. Very often, a broker firm will resell their CDs before their maturity dates. As a result, you can withdraw your money early without being penalized.
• Greater convenience. One major benefit of utilizing the broker firm for your brokerage CD is being able to purchase more than one from multiple banks, yet still utilize the same firm. Taking advantage of this perk allows you to benefit from FDIC insurance on all of your accounts without having to visit separate banks on your own.
• Interest rates are usually higher. Because broker firms have strong negotiating power in the national marketplace, they can usually offer the best CD rates even compared to banks.

While the brokerage CD is an enticing form of investment, it may not be the right tool for you. So to avoid investing in something you're not truly going to benefit from, it's a good idea to conduct more research before making your final decision.

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