Investing, Stocks, Economy, Value, Income, Apple, Passive, Real estate, Google, Retirement, Housing, Buffett, Inflation, Dividends, Recession, China, Interest rates, Dividend, Oil, Banks, Iphone, Retirements, Stock, Housing bubble, Personal finance.
Although most people think that you can only buy CDs from a bank, brokerages also sell CDs and they may offer you some advantages.
Banks generally issue large blocks of CDs to brokerages, who then break the blocks up to re-sell to their customers. Because the brokerages purchase the CDs in large blocks, they are able to negotiate higher rates than an individual customer can get from a bank. The brokerages generally re-sell the CDs to their customers without fees.
Brokerages sell re-sell these CDs without fees because they want to keep their clients money within the brokerage. When the CD expires, the money is still with them, and can be re-invested in stocks, bonds, or another product that they offer.
Brokerage CDs are usually FDIC insured by the original issuing bank.
For consumers, brokerage CDs offer the following benefits:
In addition, brokerages often offer more exotic CD products. Below are some of the different types of CDs offered by brokerages:
Callable CDs usually offer a higher rate of interest because the issuer reserves the right to buy them back at some point in the future. For example, if interest rates drop, the issuing bank may decide that it can borrow money for less than it is paying on some of its CDs, and it may buy back those CDs. Most callable CDs come with at least a year of call protection.
If you want to lock your money in for a certain period of time, and believe interest rates are going to rise in the future, these may be good bets.
Zero CDs don’t pay interest over the term of the CD or have a coupon. Instead, you buy the CD for discount over its face value and when it matures you get the full face value. So, you might buy a 5-year, $20,000 CD for $15,000 and when the CD matures you would get the full $20,000.
The biggest disadvantage to Zeros is that the income is taxed annually by the IRS. So you will need to pay taxes on the income you are earning without receiving the income until the maturity date. If you hold a Zero in a tax-exempt account then this wouldn’t be an issue.
These are CDs that you can purchase from others on the secondary market. The prices of these CDs depend on the direction of interest rates, the credit worthiness of the issuing bank, and other competitive products.
If you plan on buying Brokerage CDs with the intent of selling them, then you should consider several factors.
1) What do you think will happen with interest rates? If interest rates drop, the value of your CD will drop with it.
2) The credit worthiness of the issuing bank. A large percentage of secondary market brokerage CDs are purchased by large institutions who only want CDs issued from highly rates banks. You can check Bauer Financial. An issuing bank should have 4 or even preferably five stars or the value of your CD will decline immediately after you bought it. If you plan on holding it to maturity, and the bank is FDIC insured, this is not an issue.
3) Ask the broker to check the value of similar issues on the secondary market.
Read about one person’s experience buying and selling Brokerage CDs. He offers some good tips.
In general, as with all cash equivalent investments, be sure to run the numbers and take into account the other benefits and drawbacks of the investment before making a decision. You should also talk to a certified investing professional who can help you evaluate your choices.
