Share certificate

What is a share certificate?

A share certificate is a certificate of deposit issued by a credit union. It represents a deposit that is made for a certain period of time that earns specified dividends over that period.

Deeper definition

A share certificate is similar to a certificate of deposit (CD). The only difference is that it is issued by a credit union. In practice, many credits unions call their share certificates CDs.

Share certificates are issued for a fixed period of time, generally between three months and five years. The interest rate or dividends tend to be slightly higher than other forms of savings.

The longer the term of the share certificate, the higher the dividend.

Because share certificates are guaranteed by the National Credit Union Share Insurance Fund (NCUSIF), they are a safe and secure investment.

Because share certificates are similar to bonds and CDs, the money is tied up for the period of the certificate. Usually, it’s difficult to redeem the certificate early. In those instances where it is allowed, there are hefty early withdrawal penalties that negate any earnings.

The dividend earned from a share certificate is fixed at the date of purchase and does not change during the duration. This is great if interest rates fall, but not so good if they rise.

Some credit unions do offer share certificates with a variable rate that protects you during periods when rates rise, but you lose out when they fall. The dividend rate of share certificates is quoted as an annual percentage rate (APR), but if you reinvest the interest, the actual rate of return you get will be higher due to interest compounding.

Share certificate example

Jessica has $10,000 that she wishes to invest. She considers various options, including savings accounts, certificates of deposits and stocks. She decides to invest her money in a share certificate issued by a local credit union because of the higher guaranteed dividend and because she knows her money is secure. She invests for a period of five years.

Are you planning to invest in credit union share certificates? Check Bankrate’s comparison tables and establish the returns you will earn for different periods of time.