Definition

• A certificate of deposit, or CD, is an account into which you place a certain amount of money for a specific period of time, over which your money accrues interest. Unlike a traditional savings account, your funds are not liquid, meaning that you cannot access your money readily until the stated holding period is over. In return, financial institutions typically grant higher interest rates for CDs than for savings accounts.
  
  

Warnings

• When choosing a CD, it's important to know a good deal from a fake deal. The Federal Deposit Insurance Corp. warns that a financial institution may advertise CDs with much higher interest rates than other institutions, but it turns out that the advertised rate only applies to a certain portion of your funds. In other cases, CDs are offered at mediocre interest rates, but the salesperson offers to add money to the CD purchase to make it equivalent to a higher interest rate. When that account matures, it's unlikely the salesperson will make the same offer on the purchase of a new CD, and the buyer may end up choosing an uninsured investment that is a poor choice for the customer but means big bucks for the seller.
  
  

Maturity

• Oftentimes, investors don't clearly understand the date of maturity for their CD, and are shocked to find that they have tied up their funds for much longer than expected. It's important to understand the length of your CD, because early withdrawals come with penalties, such as forfeiting the interest that accrued on your account. Get the date of maturity, interest rate, payment time frames -- generally monthly or semiannually -- and method of payment in writing. Also, ask about what happens to your funds if you don't withdraw them once the CD matures. Will you receive a new interest rate or keep the same one? If the market improves, keeping the same rate won't be beneficial.
  
  

Laddering

• To deal with the issue of liquidity, you may consider laddering your CDs. This process involves dividing up your money among several CDs with staggered dates of maturity so that you have shorter time frames between which you may access your funds. For example, if you had $15,000 to put away, you would divide it into three $5,000 accounts with dates of maturity at six months, one year, and two years. Once the six-month account matures, the one -ear account only has six months before it's ready for maturity, and so on. You may re-invest the first CD or access the funds. By continuing to replace the funds, you're ensured the benefit of the highest interest rates, according to Bankrate writer Laura Bruce.