When it comes to investing in certificates of deposit (CDs), you have the option of choosing between traditional bank CDs and brokered CDs. While both types of CDs offer a fixed rate of return and a guaranteed principal, there are significant differences to consider.
In this article, we will explore the distinctions between brokered CDs and bank CDs to help you make an informed investment decision.
Issuer and Accessibility
Bank CDs: Bank CDs are issued directly by banks and credit unions. When you open a bank CD, you are lending money to the bank, and they, in turn, pay you interest over a specific term. Bank CDs are typically accessible through the bank’s branches, online platforms, or by phone.
Brokered CDs: Brokered CDs are issued by banks but are sold through brokerage firms. When you invest in a brokered CD, you purchase the CD through a broker who acts as an intermediary between you and the issuing bank. Brokered CDs are often available through online brokerage platforms or financial advisors.
Availability of Options
Bank CDs: Banks offer a range of CD options with different terms and interest rates. You can choose from a variety of CD maturities, such as 3 months, 6 months, 1 year, or longer. Banks may also offer special promotional CDs with higher rates or specific features.
Brokered CDs: Brokered CDs provide access to a broader selection of CD options from various banks. Brokers aggregate CDs from different banks and offer them to investors, providing a wider range of terms, interest rates, and issuers to choose from. This can allow you to diversify your CD investments more easily.
Liquidity and Secondary Market
Bank CDs: Bank CDs typically have a fixed term, which means you agree to keep your funds in the CD for the specified period. If you need to access your money before the CD matures, you may incur early withdrawal penalties. However, some banks offer “no-penalty” or “liquid” CDs that allow you to withdraw funds without penalties before the maturity date.
Brokered CDs: Brokered CDs can offer more liquidity compared to bank CDs. Although brokered CDs have a fixed term, they can be traded on the secondary market before maturity. This means you have the option to sell your CD to other investors if you need to access your funds. However, selling a brokered CD before maturity may result in a gain or loss depending on prevailing interest rates.
Bank CDs: Bank CDs are typically FDIC-insured up to the maximum limit allowed by law, which is currently $250,000 per depositor, per institution. This insurance protects your principal and interest in case the bank fails.
Brokered CDs: Brokered CDs can also be FDIC-insured if they are issued by FDIC-insured banks and held in the broker’s name. However, it’s essential to ensure that the brokered CD you purchase is indeed FDIC-insured and to understand the specific terms and conditions of the insurance coverage.
Yield and Pricing
Bank CDs: Banks offer CDs with fixed interest rates determined at the time of purchase. These rates remain consistent throughout the CD’s term. The interest rate offered may vary based on factors such as the term length, the bank’s current rates, and market conditions.
Brokered CDs: Brokered CDs may offer higher yields compared to bank CDs due to the increased competition and access to a broader range of CD options. The yield on brokered CDs can be influenced by factors such as prevailing interest rates, the issuing bank’s credit rating, and demand in the secondary market.
When choosing between brokered CDs and bank CDs, it’s crucial to consider factors such as issuer accessibility, availability of options, liquidity, FDIC insurance, and yield. Assess your financial goals, risk tolerance, and liquidity needs to determine which type of CD best aligns with your investment strategy.
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The article above was produced via automated technology and then fine-tuned and verified for accuracy by a member of our editorial team.