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Certificates of deposit (CDs) are popular investment vehicles for investors with low risk tolerance and those with money to set aside for a short period of time. When you invest money in a CD, you're buying a product with a fixed rate of return and a defined investment period with a maturity date. Interest rates are higher on CDs than they are on savings accounts because CDs have a defined time period in which the bank will be able to use the money for loans. When you take principal out of a CD before maturity, there is usually a penalty charged. You can generally take interest out of a CD without penalty.
CD interest is generally paid monthly and compounds, but you need to check with your financial institution to make sure this is true of your individual CD. You can deposit money into a CD just like a savings account, or you can buy brokered CDs within brokerage accounts and IRA accounts. The interest paid on certificates of deposit varies based on the term of the CD. The longer you agree to keep your money in, the higher your interest will be.