CD Risks
What are the Risks with a CD?
The risks associated with investing in CD's are different than the risks of most other types of investments but it is best to understand them before moving forward. The first risk is that you are committing your principle into the banks care for a specific period of time. The amount of time is selected by you, but the bank expects to have your money for the full term you have selected. If you want, or need your money sooner there is a potential penalty that you must pay. This penalty can possibly cost you some of the original amount you gave the bank or credit union (see Types of CD penalties). There are ways to minimize the possibility of loss from this situation that you should consider (see Minimize CD penalties).
There is also the risk that the interest you will earn on the CD will not be as much as you might earn in the stock market through a mutual fund or direct stock investment. When the stock market is strong the earnings potential usually exceeds the rates that banks are willing to pay for CD deposits. When you make a commitment to a CD for a specific term and amount you cannot take advantage of higher future CD rates until your current CD matures (reaches the end of the time you agreed to keep it on deposit). This means you might be kept from taking advantage of higher interest rates in the future. To give yourself greater flexibility sees "What is laddering of CD's".
Another risk of investing in a CD is that you might need some of the money for an emergency and now it is tied up at the bank/credit union. The possibility of this becoming a problem and causing you to incur penalties can be minimized by taking a few simple steps (see Minimize CD penalties).
The only other risk that you might face is that the bank/credit union in which you have made your deposit "fails" and is taken over by a government agency or another bank. If your bank is taken over by another bank they must honor the terms of your original agreement. There is little or no risk in this situation. Make sure to keep all your paperwork ready should this possibility arise. If your bank/credit union is taken over by a government agency (FDIC or NCUA) then your deposits are insured with some exceptions (see Federal Deposit Insurance and Other insurance under CD Rates & Insurance).
