If you want to make more with your money than the dividend rates on savings account provide, but you are not interested in the risks of investment, a certificate of deposit — or share certificate — may be the savings solution you’re searching for. Unlike the stock market or other investments, share certificates are insured in the same way as your checking or savings accounts are (by the FDIC for banks or the NCUSIF for credit unions), so putting your money into a share certificate is a safe financial bet — just make sure you’re getting your share certificate from an FDIC or NCUA member organization.
However, share certificates are not for everyone: the big downside to share certificates is that you have to keep your money in them for a certain period of time, ranging from months to years. If you need access to your cash early, you will face some hefty penalties that may eat up anything you’ve earned. Still, if you’re looking for a safe, long-term investment, share certificates can be a good choice.
We’ll walk you through share certificate basics and help you decide if a share certificate is a good place to put your money.
What to expect from a share certificate
All share certificates have a fixed “term,” which is the number of months or years it will take to reach maturity. The longer the term, the higher the dividend rate. During that term, you typically can not take your money out — at least not without a paying significantly for the privilege — so when you put your money into a share certificate, you will want to be sure that the term is a duration of time you can live without the money.
Some share certificates — usually called Liquid share certificates — will offer more options to let you access your money, but will still have more restrictions than an ordinary savings account… and often offer lower dividend rates than traditional share certificates, to boot. Your share certificate may also be “callable,” which means that your financial institution can end the term after a set period, but before the term is up — which they typically will if dividend rates drop. You will likely find a higher dividend rate on a callable share certificate to make up for that uncertainty.
When you get your share certificate, your dividend rate is usually fixed, meaning it won’t change. Fixed-rate share certificates are a particularly good buy if dividend rates are likely to drop — but they’re less of a good buy if dividend rates are likely to rise, because you will be stuck for the term on the lower dividend rates. You can also get share certificates with variable rates that change based on current rates or bump-up share certificates that will let you “bump up” your rate if rates are on the rise.
Most share certificates will also have a minimum deposit amount, so if you don’t have a decent amount to invest, a savings account might be a better bet.
How dividend helps your share certificate grow
You will see dividend rates for share certificates written as annual percentage rate (APR) and annual percentage yield (APY). The APR is the dividend rate you’re getting, but since many share certificates pay interest multiple times a year (often adding it to the principal balance of your share certificate) the actual rate of return you’re getting will be slightly higher than the APR — this is the APY. The APY will vary depending on APR and how frequently dividend payments are made.
Like with any financial product, you will want to shop around for the best rate before you get a share certificate — rates will vary greatly, so don’t just talk to your local financial institution and assume you’re getting the best deal. Bankrate’s list of share certificate rates can help you find the best rates for different types of share certificates.
What is a share certificate ladder?
Because your money is locked into a share certificate, if you’re investing in a share certificate you may want to consider laddering your share certificates. This means that instead of putting a single large investment in one share certificate, you would split your money amongst several share certificates that mature at different times, allowing you regular access to your cash.
For example, you might invest in a one-year share certificate, a two-year share certificate, and a three-year share certificate to have access to your money annually — as the share certificates mature, you could buy new, three-year share certificates to continue the ladder or pull your money out if you need it. You can split your money into as many share certificates as you would like — though expect lower dividend rates for shorter term share certificates — allowing you access to the funds as often as you feel necessary.
Should I invest in share certificates?
If you’re looking to grow your savings and don’t want to take on much risk, a share certificate can be a good bet. Before investing, you will want to make sure you can do without the money for the duration of the term — if you might need access to your savings, you will be better off looking for savings or money market accounts with better than average dividend rates.
It is also worth considering whether dividend rates are likely to rise or fall in the future — though share certificates have a lot less risk than other investments, if dividend rates go up after you’ve invested, your money could be doing more for you elsewhere.