The Disadvantages of Certificate of Deposit

Investing in a certificate of deposit is not without flaws. A certificate of deposit has many disadvantages and some investors will not invest in a certificate of deposit at all. This section of Certificate of Deposit website discusses the disadvantages of certificate of deposit. Below are the disadvantages of certificate of deposit.

The disadvantages of certificate of deposit are:

Not a marketable security

A certificate of deposit is not a marketable security. Since the certificate of deposit is not marketable, if the certificate of deposit investor needs to cash the certificate of deposit before its redemption, the investor will pay early redemption penalty.

Certificate of deposit rates

Certificate of deposit rates are also an issue with investing in a certificate of deposit. Certificate of deposit rates vary from bank to bank. Certificate of deposit investors need to do some home work to find the banks with the most attractive certificate of deposit rates. Some banks advertise their certificate of deposit rates but some banks do not post their certificate of deposit rates even though they may have the best certificate of deposit rates.

Low certificate of deposit rate of return

Certificates of deposits are well known among stocks and bonds investors for their low rates of return. A certificate of deposit rate of return is usually substantially lower than the rates of return offered by Treasury bills, Treasury notes and bonds. Mutual funds and stocks also offer much higher rates of return than certificate of deposit rate of return, even from the banks that offer the best certificate of deposit rate of return. However, a certificate of deposit rate of return is usually more than money market rate of return.

Tax on income from certificate of deposit

Income from a certificate of deposit is taxed at the federal, state, and in many cases, local levels of government. This makes investing in a certificate of deposit less favorable in tax terms.