Banking

What’s the difference between a share certificate and a certificate of deposit?

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  • Share certificates are issued by credit unions, while certificates of deposit are issued by banks.
  • Both investment vehicles are low-risk options with fixed interest rates for set term lengths.
  • You’ll generally pay an early withdrawal penalty if you take money out before your term is up.
  • Read more of Insider’s personal finance coverage here.

A certificate of deposit or share certificate is a low-risk option to grow your money with a stable interest rate. Here’s what you need to know about these investment tools.

Similarities and differences between share certificates and CDs

Share certificates and CDs are designed as relatively long-term investment vehicles; while you can get one for as short as three months, many CD offerings are one year at a minimum.

Generally, the longer the term of a share certificate or certificate of deposit, the higher the interest rate you’ll receive. Both types of investments usually come with early withdrawal penalties if you take your money out before your term is complete, which can eat into your earnings.  

The main difference between share certificates and certificates of deposit is that share certificates are issued by

credit unions
, while certificates of deposit are issued by banks. Share certificates are guaranteed by the National Credit Union Share Insurance Fund, while the FDIC insures CDs at banks. 

Who should invest in a share certificate or CD?

Both investment vehicles are generally considered extremely safe, so you should consider them if you’re risk-averse or are nearing retirement and don’t want to gamble on your money losing value.

High-yield savings accounts
and

money market accounts
have variable rates, so your money could potentially earn a lower rate of return in the long run than a locked-in CD or share certificate rate.

However, if you’re younger and want the possibility of higher returns, you might consider investing in stocks, an exchange-traded fund, or an index fund

What are alternatives to share certificates and CDs?

While CDs are solid investing tools, they do come with their drawbacks. For instance, you likely won’t be able to withdraw your money before your term expires, or you’ll face an early withdrawal penalty that will eat into your earnings. If you are interested in another investment vehicle, consider these options:

  • High-yield savings account. These accounts generally have comparable interest rates to CDs and share certificates, depending on the term length. However, the interest rates can rise and fall with a high-yield savings account, as opposed to the fixed rate you receive with a share certificate or CD. 
  • Money market account. These are interest-bearing accounts that are offered by banks and credit unions. Unlike savings accounts, CDs, and share certificates, you can often get checks and a debit card with a money market account, similar to a regular checking account. 
  • Investing in the stock market. This method has the highest potential for returns, but there’s also a significant risk of losing money. Stock market investments aren’t insured by the government. 

Share certificates and certificates of deposit really aren’t all that different, so the choice will really come down to if you prefer to do business with a credit union or a bank. 

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