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What is a Brokered CD?

Brokered CDs, also known as brokered certificates of deposit, are a type of certificate of deposit (CD) that are bought and sold through brokerage firms or financial intermediaries, rather than directly from a bank or credit union. While the underlying concept of a brokered CD is similar to a traditional CD, there are a few key differences.

Here's how brokered CDs typically work:

  1. Issuer: Brokered CDs are issued by banks, credit unions, or other financial institutions, just like traditional CDs. These institutions offer CDs with various terms and interest rates.

     

  2. Brokerage Firm: Instead of purchasing the CD directly from the issuing bank, you buy brokered CDs through a brokerage firm or financial intermediary. These firms act as intermediaries, connecting buyers and sellers of CDs in the secondary market.

     

  3. Availability and Selection: Brokered CDs provide access to a wide range of CD offerings from different banks and credit unions. This gives investors the ability to choose from a broader selection of terms, interest rates, and issuers. It allows you to diversify your CD holdings across multiple institutions, potentially increasing the FDIC insurance coverage on your deposits.

     

  4. Secondary Market: Unlike traditional CDs, brokered CDs can be bought and sold on the secondary market before their maturity date. This means that if you want to sell your CD before it reaches maturity, you can do so through the brokerage firm. The availability of a secondary market provides liquidity and flexibility to investors who may need to access their funds before the CD's term ends.

     

  5. Pricing: The price of a brokered CD in the secondary market may be different from its face value or original purchase price. The price can fluctuate based on changes in interest rates, market demand, and the remaining time until maturity. If you sell a brokered CD before maturity, you may receive more or less than the initial investment amount.

     

  6. Brokerage Firm as Custodian: When you buy a brokered CD, the brokerage firm typically holds the CD on your behalf. The brokerage firm acts as the custodian of the CD, facilitating the purchase, sale, and management of the investment.

     

It's important to note that while brokered CDs can offer benefits such as access to a wider range of offerings and potential liquidity, they may also involve additional fees or costs compared to traditional CDs. Additionally, the FDIC insurance coverage applies to brokered CDs, but it's essential to understand the coverage limits and ensure your deposits are within those limits.

Brokered CDs are suitable for investors who want to diversify their CD holdings, have access to a broader range of issuers and terms, and potentially trade CDs on the secondary market for liquidity purposes. However, it's crucial to research and understand the specific terms, risks, and fees associated with brokered CDs before investing.

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