Primary Vs. Secondary Certificates of Deposit

You buy primary CDs from banks or credit unions.

Keith Brofsky/Photodisc/Getty Images

When compared with other securities, certificates of deposit are generally viewed as low risk investments. In simple terms, CDs are debt instruments. You lend money to the CD issuer, and you earn interest on that debt over the course of months or years. However, the CD marketplace is surprisingly complex. You can buy a variety of CDs on both the primary and secondary investment markets.


Transactions in the primary investment market involve an investor dealing directly with the issuer of a security. Within the CD arena, the primary market takes the form of your local bank or credit union. You deposit your cash directly at that institution, and you receive a time deposit contract that details the terms of your agreement. The secondary market involves investment brokers acting as intermediaries. Brokers buy CDs from banks or from other investors who currently hold CDs. You have many more buying options on the secondary market, as your broker can buy CDs from just about anywhere. The primary market is limited to the offerings currently available from banks.


Many banks impose surrender penalties if you cash in a CD before it reaches maturity. You can buy no-risk CDs on which you can make withdrawals at any time, although the yields are typically lower than on standard CDs. With a brokered CD, you are not bound by the maturity date, as you can sell your CD to another investor. This works in your favor when interest rates are falling because you can sell an older, high-rate CD at a premium. On the flipside, you may have to sell your CD at a discounted rate if higher-yield CDs are readily available.


Primary market CDs are often automatically renewable. When your CD matures, you have a seven- to 10-day grace period to make withdrawals before a new CD term begins. Thereafter, withdrawals are subject to premature surrender penalties. However, the automatic renewal feature may appeal if you want to keep your funds in the account. Secondary market CDs are typically non-renewable. When the CD matures, the issuer deposits your money into your brokerage account. You can then shop around for a new CD or another type of investment.


Primary market CDs normally pay a flat rate of interest. Therefore, you can calculate your earnings when you first establish the account. Some brokered CDs pay simple interest, although the interest does not typically compound. Instead, the issuer disburses interest payments on a monthly, quarterly or annual basis. High yield secondary market CDs are often indexed to the stock market. In theory, your returns could exceed the earnings on a conventional CD. However, you may end up with nothing but your principal if the market tanks.