Can You Trade Certificates of Deposit?

Certificates of deposit (CDs) offer a safe, secure way to save money for short- and long-term financial goals. Brokered CDs are a specific type of CD product that can be traded on the secondary market. Investing in brokered CDs can potentially yield higher returns, though they can carry more risk than traditional CDs purchased through a bank or credit union.

How Brokered CDs Work

A brokered CD is a certificate of deposit that a bank issues but a brokerage sells. Although brokered CDs are technically not insured by the FDIC, the broker’s underlying CD purchase from the bank is insured. That makes it essential to buy them from a financially sound company.

A brokered CD can pay interest to investors, typically on a monthly basis. The difference is that brokered CDs can be traded on the secondary market.

Brokered CDs have set maturity terms and minimum deposit requirements, which can vary by the brokerage. The brokerage may offer two options for purchasing these CDs:

• New issues
• Secondary trades

New issues are brokered CDs that are offered for sale to investors for the first time. Secondary trades are brokered CDs that another investor owns and wants to sell. The minimum deposit for each one may be different. For example, there may be no minimum for new issues but a $10,000 minimum for secondary trades. You may also pay a commission to purchase secondary trades.

When you've purchased a brokered CD, either a new issue or secondary trade, you can then decide how long to hold it. You can keep the CD until it matures, then withdraw your initial deposit and earned interest. Your brokerage may transfer the funds to your settlement account automatically. The other option is to sell the CD before maturity.

How to Trade Certificates of Deposit

If you'd like to trade brokered CDs, you'll first need to open an account at a brokerage that offers them. This process usually involves completing an application and providing any necessary documentation. Many brokerages allow you to open an investment account online.

When your account is open, you can link it to a funding source. For example, you can connect your bank account to purchase brokered CDs. The next step is perhaps the most important: researching brokered CD options. Specifically, you'll want to consider:

• CD maturity terms
• Interest rates
• Minimum deposit requirements
• Trading fees

When you find one or more brokered CDs you'd like to purchase, you'd just need to submit a purchase order through the brokerage. This process is similar to buying stocks or exchange-traded funds (ETFs) online.

If you already own brokered CDs and want to trade them, you can do so through your brokerage account. Selling brokered CDs is similar to selling other securities you might own in a brokerage account.

When selling brokered CDs, it's important to consider current interest rates. If interest rates have gone up since you initially purchased the CD, that can affect demand. New issues may offer higher rates than secondary trades. It's possible that you could end up losing money by trading brokered CDs in a rising-rate environment.

Pros and Cons of Trading CDs

Brokered CDs have some attractive features, though they may not be right for every investor. Before trading CDs, it's important to consider the advantages and potential disadvantages associated with doing so.

Brokered CD Pros

• Brokered CDs offer greater liquidity than traditional bank-issued CDs.
• Investors may be able to get better rates from brokered CDs than other CD options.
• Holding brokered CDs in a single account allows for easier diversification.
• FDIC coverage limits apply when brokered CDs are issued by an FDIC member bank.

Brokered CD Cons

• Brokered CDs can carry greater risk than traditional CDs.
• Callable CDs could cause you to miss out on interest earnings.
• You may lose money if you trade brokered CDs before they mature.
• Credit risk can threaten your investment.

Advantages of Trading CDs

• Liquidity. Brokered CDs give you the option to sell before maturity without facing an early-withdrawal penalty. That could make them attractive if you don't want to be locked into a CD long term.
• Rates. Banks that issue brokered CDs may use higher rates as an incentive to attract investors. So it's possible to leverage a better rate of return versus standard bank CDs.
• Diversification. It's possible to hold brokered CDs from different banks in a single brokerage account. For example, you might build a CD ladder using brokered CDs from four or five banks to try to maximize interest earnings.
• Protection. Brokered CDs enjoy FDIC protection when issued by a member bank. The current FDIC coverage limit is $250,000 per depositor, per account ownership type, per financial institution.

Disadvantages of Trading CDs

• Risk. Trading CDs can be risky because your returns may hinge on getting the timing right. If there's no demand for secondary trades because of changing rates, for example, you may have a harder time selling them.
• Callable. A callable CD can carry even more risk because there's no way to know if the bank will call it or not. If the bank does call your CD, you forfeit some of your future interest earnings.
• Maturity. Trading CDs before maturity could put money in your pocket—if you're able to sell for more than what you paid. Getting forced to sell for less than face value, on the other hand, means a loss.
• Credit risk. A brokered CD is a debt instrument, which means it's subject to credit risk if the issuer defaults. FDIC coverage can help to offset this risk, but it doesn't mitigate it entirely.

The Bottom Line

Trading CDs is something you might consider if you're interested in diversifying your portfolio. Before trading brokered CDs, it's important to compare online brokerage accounts to find one that best fits your needs. Also, consider how much of your portfolio you'd like to allocate to brokered CDs in order to manage risk.