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Definition: Brokered Certificate of Deposit
A certificate of deposit that has been purchased through a brokerage firm, stock brokers or from a sales representative, which can be simply put as- not brought directly from a bank. The place of initiation of certificate of deposit (CD) is still the bank, which has outsourced them to firms that have a reach to potential investors.
Being in a more competitive market a higher price is charged and paid for these type of CDs. What really is a CD? It is a time deposit with a bank or any other financial institution. The investor makes a commitment to leave a certain sum as deposit with the bank/financial institution for a fixed period of time, which can be 6 months, 1 year or 5 years. Basically, investors are lending money to the bank for a specified period. In return, the bank offers a higher interest rate to the investor than compared to a savings account or money market account. The higher interest rate is in exchange for not withdrawing the money from the bank for the period listed. The investor in return gets the principal deposited along-with the accrued interest on that principal on the completion of the time period, also known as maturity of the certificate. If highly necessary, the investor can redeem his/her CD before it matures, but attracting early withdrawal penalties.
Brokered CDs often offer a higher rate of interest than CDs availed directly from the bank. The main reason for this is that the brokers have a vast contact database and connectivity and they can negotiate with the financial institutions for a greater interest rate after promising the bank/financial institution a certain minimum number of deposits which are almost guaranteed. Since they are offering greater return rates and not being sold directly from the banks, they have greater market risk. Moreover, if the investor wants, he/she can trade the brokered CDs with the risk of a loss on the investment.
When one invests in a brokered CD, one may not be the sole investor. For many brokered CDs, there are a number of investors who do not know each other, they all own a piece of the deposit, which allows for larger deposits with the financial institution. Larger deposits are another way that brokers can negotiate better interest rates for investors.
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