What’s the Difference, Anyway? A Beginner’s Guide to CDs and Share Certificates

Personal Finance

You’ve probably heard of Certificates of Deposit (CDs), but have you heard of Share Certificates (Certificates)?

Many budding investors have heard of both, but they may not understand the differences between them. Yet, understanding the ins and outs of these beneficial investment products doesn’t have to be a complex ordeal. 

Keep reading to learn the key differences between these common financial tools, and discover why a high-yield Certificate might be the perfect low-risk addition to your growing investment portfolio.

CD and Certificate Differences

Aside from the name, few differences exist between the deposit accounts known as CDs and Certificates. Both options are reliable, insured investment products that require investors to deposit a set amount of money, which is then held by the issuing financial institution for a set period. At the end of the predetermined period, the investment earns a percentage of the initial deposit amount. 

So then, what are the differences? Simply, the most notable differences (aside from the names) are the financial institution that issues each product and the federal agency that insures them.  

  • For-profit banks issue CDs, while member-owned, cooperative credit unions issue Certificates. 
  • CDs and Certificates are both insured, but two different federal government agencies insure them. The Federal Deposit Insurance Corporation (FDIC) backs banks, and the National Credit Union Administration (NCUA) backs credit unions. 

CD and Certificate Similarities

As you now know, CDs and Certificates are deposit accounts that require account owners to maintain a minimum balance for a preset investment period (term) in exchange for a higher rate of return. At the end of the term, the saver receives their initial deposit along with any interest earned throughout the term.

We just discussed the differences between CD and Certificate accounts. Now, let’s cover their many similarities and benefits, which include: 

  • Higher returns than most savings accounts
  • No opening or maintenance fees
  • Choice of term length when opening the account (e.g., 12 or 24 months)
  • Fixed-rate, guaranteed returns that are determined at the time of account opening
  • Low risk against loss since accounts are federally insured by either the FDIC or the NCUA
  • Interest earnings that are typically compounded and credited quarterly

Individuals prepared to make higher initial deposits can opt to open a Jumbo Certificate or CD, which in turn can provide even higher returns than standard Certificates. Generally, the minimum deposit of $100,000 for a credit union Jumbo Certificate is the same as a standard Jumbo CD. 

CD and Certificate Variations 

When opening new CDs or Certificates, investors may be offered a range of options around choices such as term length and opening deposit amount. These options make it easy to customize the product to work for individual investment needs and goals. 

Here are a few of the variations typically found when deciding on the right product for you: 

  • Minimum deposits — CDs and Certificates require a lump sum deposit at the time of account opening. Varying deposit requirements allow novice investors an opportunity to start their investment journey without a substantial financial commitment. However, larger initial deposits can be associated with higher returns.
  • Term length — The return on deposit differs based on how long the money will go untouched in the account. Terms could be as short as several months or as long as five years. Savers who select maximum term lengths, which can vary significantly by financial institution, typically receive the highest returns on deposits.
  • Differences in early withdrawal penalties — CDs and Certificates discourage investors from withdrawing funds before the end of the term, or “maturity date.” Early withdrawals come with fees, which result in lower returns. Credit unions typically charge fewer financial penalties if a member must close an account early.
  • Increased earning opportunities — Connexus is one of the few financial institutions allowing savers to bump the rate once a term using a Bump-Up Certificate. Investors select this Certificate to take advantage of an anticipated rise in interest rates.

Is a CD or Certificate right for me?

To determine whether CDs and Certificates are a good fit for your finances, start by closely examining your situation. Consider your current financial standing and short- and long-term goals, like liquid cash-on-hand and target retirement dates.

For example, suppose you already have an emergency fund established to cover unexpected expenses that may arise during the Certificate’s term. In that case, there’s less risk that you’d need to make early withdrawals on a Certificate (which would diminish returns). Before opening a Certificate, it also pays to make note of any upcoming events or major purchases, such as travel or a new vehicle, scheduled during the Certificate’s term. 

If you have a solid emergency fund in place and still have cash on hand, a Certificate might be the perfect place to park that extra money and let it earn a great return.

If you’re ready to protect your assets and diversify your portfolio with guaranteed returns, open a federally insured, high-yield Connexus Certificate today!