What is a certificate of deposit (CD)?

A certificate of deposit (CD) is a fixed-term deposit that requires the money to be held for a specified period, commonly ranging from a few months to several years. The primary characteristic of a CD is that it offers a higher interest rate than traditional savings accounts, in exchange for the depositor agreeing to leave the funds untouched for the duration of the term. This helps banks manage their cash flow and provides a secure investment option for individuals looking to earn interest on their money without the risks associated with stock market investments. At maturity, the principal amount along with the interest accrued is returned to the depositor. If the funds are withdrawn before the maturity date, penalties may apply, highlighting the importance of the fixed-term nature of CDs. This fixed nature sets CDs apart from other financial instruments, such as savings accounts, which typically allow for more fluid access to funds.