Is a Brokered CD the Right Investment?

A brokered certificate of deposit (CD) is a type of investment that is sold through a brokerage firm rather than a bank. These CDs are issued by financial institutions and can offer higher CD rates than traditional CDs because they are sold in large denominations. This allows the issuing institution to offer a better rate to investors.

When you invest in a brokered CD, you are essentially lending money to the issuing institution for a set period of time, typically ranging from a few months to several years. In return, the institution pays you interest on your investment. The CD rate on a brokered CD is fixed, meaning it will not change during the term of the CD.

One of the main benefits of investing in a brokered CD is that it is considered a low-risk investment. Because the CD rate is fixed and the investment is FDIC-insured, your principal investment is protected. Additionally, brokered CDs are an attractive option for those looking for a higher CD rate than traditional CDs, as well as for those who have a larger sum of money to invest.

Before setting up a brokered CD, it's important to consider the terms of the CD, such as the maturity date and penalties for early withdrawal. Maturity date is the date on which the CD term ends, and the principal and interest are returned to the investor. The penalties for early withdrawal vary depending on the institution and the terms of the CD, so it's important to understand these before making a decision.

When you're ready to set up a brokered CD, you'll need to find a brokerage firm that offers them. You can do this by searching online or by asking your financial advisor for recommendations. Once you've found a brokerage firm, you'll need to open an account with them. This process is similar to opening a bank account and typically involves providing personal information and completing paperwork.

After your account is set up, you can then purchase a brokered CD. The brokerage firm will provide you with a list of available CDs and their terms, including the CD rate, maturity date, and penalties for early withdrawal. You'll need to select the CD that best meets your needs and invest a minimum amount, which is typically $1,000 or more.

It's important to note that brokered CDs can be sold on the secondary market, which means that you can sell your CD to another investor before the maturity date. This can be beneficial if you need to access your money early or if CD rates have risen since you purchased the CD. However, it's important to keep in mind that the secondary market is not guaranteed, and the price you receive for your CD may be lower than the original investment.

In conclusion, a brokered certificate of deposit (CD) is a type of investment that is sold through a brokerage firm rather than a bank. They can offer better CD rates than traditional CDs and are considered a low-risk investment option. Before setting up a brokered CD, it's important to consider the terms of the CD and to consult with a financial advisor to determine if it's the right choice for your individual financial situation and goals. With proper research and understanding of the terms, a brokered CD can be a valuable addition to your portfolio.

 
Author: Brian McKay
January 24th, 2023