Finding the Best CD Rates

Certificates of deposit (CDs) offer the best of both worlds-reliable returns with very little risk. But not all CDs are the same. This primer will help you get the most bang for your buck.

Advertisements for certificates of deposit (CDs) are everywhere. If cash is burning a hole in your pocket, buying one could provide a safer alternative to riskier investments like stocks. By learning how to obtain the best rates, you can maximize your return.

Higher rates with brokers

Brokered CDs-those sold by brokerage firms as opposed to banks-generally offer the best CD rates. But you may have to spend $10,000 or more to buy one, and they're not all FDIC insured. Although CDs rarely fail, you'll be assuming slightly more risk if you buy one of the uninsured variety. If safety is your primary concern, ask your broker for one that's FDIC insured and review the purchase paperwork for FDIC disclosures before you sign.

The broker's commission will also be subtracted from your total investment amount. Crunch the numbers first to determine whether you'd actually be better off with a brokered CD or one from a bank.

The minimum investment amount may tempt you to tie up more money in a brokered CD. Brokers will assure you that you can easily sell these investments on the secondary market if you need to make an early withdrawal. Don't believe it. Your ability to sell (and make a profit) will depend largely on market conditions at the time, and no broker has a crystal ball.

Pay Attention

Unless you specifically advise otherwise, most banks and brokers will automatically renew your CD at maturity. If interest rates are rising, you could find yourself locked in at the old rate and unable to capitalize on newer offerings.

You'll probably receive a notice from your bank or brokerage firm when your CD is about to mature; but don't depend on them to keep track of that investment for you. Make a note on your calendar to contact your bank or brokerage firm at least 30 days prior to maturity.

Tips for success

When you buy a CD, you're giving the seller permission to invest your money for a set period of time. If you agree to a longer investment period, they'll usually (but not always) reward you with a higher rate.

If you can afford to part with your money for a while, buy a long-term CD in order to maximize your return.

CD terms vary. Read newspaper ads, visit local banks and credit unions, and surf online for the best deals. In general, they're simple, convenient, and safe. Although they don't offer the upside potential of a more aggressive investment like stocks, they don't carry the risk, either. Research all your options in order to find the best rates, and you'll be smiling all the way to the bank.