A certificate of deposit, or CD, offers a safe and secure way to save money that you may not need to use right away. CDs can offer a guaranteed rate of return on your money, in exchange for leaving those savings in the CD until it matures. A brokered CD is a savings option you may see offered through your brokerage. These CDs share some similarities with the CDs you may find at your bank or credit union. But there are some things that set brokered CDs apart from the crowd.
Brokered CD, Definition
A brokered CD is a certificate of deposit that’s offered through a brokerage but issued by a bank. Since they’re issued by a bank, brokered CDs can be FDIC-insured just like other CDs. The standard insurance coverage limit of up to $250,000 per depositor, per account ownership type, per financial institution, applies. That protection is available to you if your brokerage partners with an FDIC-insured bank.
Brokered CDs can earn interest just like other CDs. This can be a fixed interest rate that applies for the entire CD term. But you may earn a higher yield from a brokered CD than you would a regular CD.
Aside from potentially offering a higher interest rate to savers, brokered CDs different from other CDs in one important way: they can be traded on the secondary market.
How Brokered CDs Work
Ordinarily, when you purchase a CD at a bank or credit union you’re agreeing to leave your money in that CD for its entire term. Once the CD matures, you can withdraw your initial deposit, along with the interest earned. If you were to withdraw money from a CD ahead of its maturity date, you might pay a penalty for doing so. This penalty could be a flat fee or your bank may require you to forfeit some of the interest you’ve earned.
Brokered CDs don’t work like that. Instead, you can sell your CD on the secondary market at any time, without triggering an early withdrawal penalty. That’s an advantage if you want to benefit from the guaranteed rate of return that CDs can offer without necessarily being locked in to a set CD term.
Pros of Brokered CDs
Saving money in brokered CDs can offer some advantages over saving in a regular CD. Here are the main advantages in a nutshell.
Flexibility. Since you can sell brokered CDs on the secondary market at any time and you’re not bound by a set maturity date, they’re a more flexible savings option than regular CDs. That might be important to you if you’re looking for a higher yield savings option that still allows you to keep your money relatively liquid.
Accessibility. Another advantage of brokered CDs is that you don’t have to necessarily open multiple bank accounts to own them. Instead, you can open just one brokerage account and hold multiple brokered CDs issued by different banks inside it. That can work in your favor if you want to own a mix of CDs with different terms and annual percentage yields.
CD terms. Standard CD terms often range from as little as 30 days to up to five years, though some banks will extend that even longer. Brokered CDs can let you take advantage of a wider variety of CD terms, which could be useful if you want to build a CD ladder.
Rates. As mentioned previously, it’s possible that you may be able to get better rates with a brokered CD versus a regular CD. That could be significant if you’re investing in CDs in an otherwise low interest rate environment when banks are slashing rates on deposit accounts.
Cons of Brokered CDs
While a brokered CD account can have its upsides, there are a few drawbacks to consider.
Loss potential. Being able to sell a brokered CD at any time may sound appealing, but it’s important to get the timing right. If you sell your CD at the wrong time, it’s possible that you could lose money if the sale price ends up being less than what you paid. Additionally, some brokered CDs are callable, which means if it’s called before the maturity date you’ll miss out on a chance to earn interest.
Sales fees. While you won’t pay an early withdrawal penalty for selling a brokered CD before it matures, that doesn’t mean those transactions are fee-free. You could still be charged a transaction fee for the sale, which can erode your interest earnings.
How to Buy Brokered CDs
If you’re interested in adding a brokered CD or two into your portfolio, there are a few things to know about buying them. First, you’ll need to open a brokerage account with a firm that offers brokered CDs if you don’t already have one. When comparing online brokerage accounts, pay attention to the fees they charge as well as the account types and investment options they offer.
Once your brokerage account is open, the next step is deciding which brokered CDs you want to buy. Here, you’ll want to look at things like:
Minimum deposit requirements
Sales fee if you decide to sell before maturity
Whether the CD is callable or not
If a brokered CD is callable, the bank that issued it may end the CD before it reaches its maturity date. This can happen if interest rates are declining. If you have a callable brokered CD, then it’s possible that you may not get the benefit of earning interest for the full maturity period.
Also, check to see if the brokered CDs you’re buying are FDIC-insured. Not all of them are, so it’s important to know whether your money is protected.
The Bottom Line
A brokered CD could be a good addition to your investment portfolio if you’re looking for a way to diversify while earning interest. It’s important to understand how these CDs work, in terms of selling them on the secondary market and when it makes sense to do so. And keep in mind that you aren’t limited to either brokered CDs or regular CDs; you could hold a mixture of both as part of a well-rounded investment strategy.
Tips for Investing
Consider talking to a financial advisor about whether purchasing brokered CDs is a good option. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool can connect you with top advisors in your local area in minutes. If you’re ready then get started now.
In addition to brokered CDs, consider what other types of CDs may be a good fit. IRA CDs, for example, combine the benefits of bank-issued CDs with Individual Retirement Accounts. You can use them as a safe way to invest for retirement while still enjoying IRA tax benefits.
Creating a CD ladder can help you take advantage of differences in interest rates and maturity terms for regular CDs. With a CD ladder, you own multiple CDs with varying terms and rates. As a CD matures, you can decide whether to roll it into a new CD or withdraw your savings and interest.
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