Brokered CD
What is a brokered CD?
A brokered CD is a certificate of deposit sold by a middleman, called a broker. Financial institutions use brokers to market their CDs to help them gain deposits.
The rates on brokered CDs tend to be very competitive because the financial institution is competing directly with other institutions for your deposit.
Deeper definition
A CD is a deposit that you keep with a bank or other financial institution. It is secured by a certain time and cannot be accessed until that time elapses.
A brokered CD follows the same concept, but you work through a broker rather than with your financial institution. The broker holds the CD for the allotted time. A brokered CD is actually a portion of a larger CD held by a financial institution.
The broker who you purchase a brokered CD from invests a large amount of money and then sells off a certain number of shares in that investment. Each person who purchases one of the brokered CDs buys into that larger amount of money invested.
The benefit of a brokered CD is twofold:
- As the purchaser of a brokered CD, you will receive a greater amount of interest on your investment thanks to the larger amount invested with the bank. More money accruing interest equals more money at the end of the CD term.
- The bank also benefits from the brokered CD because it receives a large deposit all at once compared to traditional CDs, which may not add up to much in a single day or period.
If you’re considering investing in a brokered CD, it’s important that you work with a reputable firm because the Federal Deposit Insurance Corp. does not insure brokered CDs. Additionally, fluctuations in interest rates or a broker who desires to get out of the CD before the end of term may cause problems for the investor.
Brokered CD example
If you purchase a brokered CD through a reputable broker, you are buying a portion of a larger CD with a bank or financial institution of the broker’s choosing. You buy into this CD with other investors and benefit from the payout at the end of the CD or at some other specified time.
What’s the different between a bank CD and a brokered CD? Learn more about these two investment options.
