Definition: Certificates of deposit are really no more than loans you make to a bank.The loan is usually for a fixed period of time, such as 3-months, 6-months, 1-year or 5-year. In return, the bank gives you a fixed interest payment. You promise to leave all the money, including the interest, with the bank until the time period is up. They are insured by the FDIC up to $250,000. The only negative is that you will pay a penalty if you need to take back your money before the time period is up. You also run the risk that interest rates will go up on other products while your money is tied up in the bank.
Certificates of deposit are bought by money market funds. These funds pay slightly less than certificates of deposit. The benefit is you can take your money out at any time without a penalty. The other benefit is that, if interest rates go up, you aren't locked into a fixed rate of return. Many people prefer this flexibility. Money market deposit accounts are also insured by the FDIC.
Money market deposit accounts are not to be confused with money market mutual funds. These can also be sold by a bank, and are not insured by the FDIC.Make sure you ask before investing.
