How Can Small Investors Participate in Investments in Negotiable Certificates of Deposits?

Treasury bills can be an alternative to a negotiable CD.

Comstock/Stockbyte/Getty Images

Negotiable certificates of deposit are typically issued by banks. Many negotiable CDs are short-term funds, usually with maturity periods of two weeks to one year, and are relatively large vehicles with a minimum value of $100,000. Given their size, it can be challenging for a small investor to purchase them at all or for a slightly larger investor to purchase them and still have a diversified portfolio. There are indirect ways to participate in the market as well as similar alternate investments that can provide similar benefits.

Brokered CDs

Many investment houses sell brokered CDs. A brokered CD is similar to a CD sold directly by a bank, but is sold by a brokerage house and may also carry a negotiability provision that lets it be resold. Frequently, the brokered CD is actually a small piece of a larger negotiable "master CD," so by buying it, the investor is actually buying directly into a negotiable CD. While brokered CDs are usually billed as being negotiable, like a true negotiable CD they are at the mercy of the market when sold, and their owner could end up losing money. A brokered CD with a negotiability provision is the closest equivalent to a true negotiable CD for a small investor.

Money Market Funds

Money market funds sold through a brokerage typically invest in highly secure short-term securities. They are designed to be a safe place to park money for a short time. Thanks to the relatively short-term and risk-free nature of many negotiable CDs, some money market funds purchase them as a part of their portfolios. As such, buying a money market fund can give an investor partial exposure to negotiable CDs.

Bank CDs

While negotiable and brokered CDs with negotiability can offer attractive rates for investors that are willing to commit large sums of money, a smaller investor may be able to find a bank CD account that offers a higher rate of return, especially on common denominations such as the one-year CD. As a benchmark for comparison, one major investment firm that caters to smaller investors was offering a 0.55-percent yield on a one-year brokered CD with negotiability, as of December 2013. Bankrate showed over 20 CDs from banks and credit unions with higher rates, some with minimum deposits of $1,000 or less and rates as high as 1 percent. As a possible added benefit with a bank CD, the penalty for early withdrawal could work out to be less than the cost of selling a negotiable CD.

Treasury Bills

Investors who want a similar investment to a negotiable CD without buying into a fund or taking their money out of a brokerage account setting have another option: Short-term Treasury bills work similarly to negotiable CDs. They are available in a range of different terms, can be freely bought and sold on the secondary market, and are backed by the full faith and credit of the federal government. One drawback to short-term Treasuries is that their yields may not be as high as those on CDs. As an example, when a brokered CD that could be resold was available at 0.55 percent, a one-year Treasury was yielding 0.13 percent. For comparison, while a $10,000 one-year CD at 0.55 percent would earn $55 in interest, the 0.13 percent Treasury bill would earn $13 -- a $42 difference. The $42 delta is not a lot of money relative to $10,000, even though the percentage difference is relatively large. Investors can buy Treasury bills in increments of $100 and in terms of four, 13, 26 or 52 weeks right from TreasuryDirect.