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Investing in certificates of deposit (CD) has become one of the most popular investment choices for people looking for a relatively safe way to invest. This is because investing in a CD assures the investor with a fixed interest without risking the principal investment. Moreover, the interest rates on these investments are usually higher than the interest that people can get from their savings accounts. As a result, more and more people have now become interested in investing in CD's. However, as with any kind of investment, investing in a certificate of deposit requires that an investor gather as much information he can on the type of investment he is interested in so that he would know how it works and on what he can expect from the investment. Fortunately, investing in a CD is covered by very clear rules that have been put in place by the government to make investing in a CD safe and above board.

How it works

When people invest in a certificate of deposit, the bank or the financial institution would provide the investor with a bankbook or a paper certificate, which represents the investment. In addition to this, the bank would also issue the investor with periodic statements with regard to the CD. Certificates of deposit come with a fixed interest rate, which depends on the maturity of the CD. As a rule of thumb, higher interest rates are given certificates of deposit that have a longer maturity period. Investors have the option of either getting the interest regularly or to have the bank compound the interest. The latter option has become very popular because it allows investors to earn more from their investments. However, for people who prefer the first option, the bank can automatically credit the interest payments to their savings accounts.

When a CD approaches its maturity date, the bank would inform the investor and provide them with the option of either getting their investment outright or to $%:roll over,$%: which means to invest the amount and the interest into another CD. If in case investors would want to withdraw the amount in the CD, they would have to pay a penalty fee, which can mean a loss of six month$%:s worth of interests.

As with other investment decisions, investing in a CD requires that an investor cover his bases by learning as much as he can about the investment. As to CD's, this would involve learning how the investment works especially with regard to the interest that the investment would earn, which is very important, as this can help an investor know what he can expect from the investment.