What Is a Secondary Certificate of Deposit?

A traditional certificate of deposit requires that you deposit money into a savings institution for a fixed period of time. In return for your money, the bank pays you a rate of interest rate until the end of the fixed period, which is called the maturity date. Investors usually purchase CDs directly from an insured bank or credit union. However, you can invest in a special CD called a secondary certificate of deposit through a broker or agent.

Secondary CD Basics

Secondary CDs are also called brokered CDs, brokerage CDs or agency CDs. The agents or brokers who sell them work for stock brokerage firms or deposit brokers, which are specialists in these investments. Financial advisers also sell secondary CDs but they sometimes charge a sales fee, unlike most brokers. Acting as a middleman between you and a savings institution, a broker invests your funds in a certificate of deposit, either in your own name or combined with funds from other investors.

Advantages

Using a broker to buy secondary CDs gives you many choices of maturity dates and terms. Secondary CDs often pay higher interest rates than regular CDs, according to Bankrate.com. Using a broker also makes it easier to buy and sell multiple CDs. You can divide a large investment among many different insured institutions, getting $250,000 in individual coverage for each bank. A broker also makes it easier to buy CDs from distant banks and keeps records for you. Instead of paying early withdrawal penalties, you can often resell brokered CDs on the secondary market.

Secondary Market

You must sell a secondary CD through your broker on the secondary market if you want your money before the maturity date. You can't redeem it at the issuing bank in return for paying an early-withdrawal penalty. However, not all brokers offer resale, and the demand for secondary CDs may be small. This may lower the actual resale value below what you invested. In addition, if interest rates have gone up, you may also have to accept less than face value to get your cash early.

Other Risks

Secondary CDs are often callable, meaning the bank can give back your money early and stop paying interest. This may happen when interest rates fall below the promised rate. You risk losing money in a bank failure if you don't make sure your broker places your CD investment in a federally-insured institution. For your money to be covered, the broker's records must clearly show your ownership, according to the Federal Deposit Insurance Corporation. A dishonest broker could steal your money. If you have personal accounts in the same bank as a secondary CD, you could also unknowingly exceed the federal insurance limits.

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