Share Certificates vs CD

Understanding the differences between share certificates and CDs is easier than you might think. As you begin to learn about the distinctions between these two popular investment tools, you’ll be better-able to select the one that’s best for your financial objectives. Let’s look at the advantages and disadvantages of each, the rates of interest, liquidity, and investment warnings you should consider before deciding where to put your hard-earned money.

Read on as we explore the ins and outs of certificates of deposit and share certificates. We’ll look at what is a share certificate at a credit union, how a certificate of deposit work, and what are the pros and cons of each. 

What are Share Certificates?

What is a share certificate? Share certificates are fixed-term deposit accounts that are offered at credit unions. They typically have higher interest rates than regular savings accounts, but require time commitment from investors.

Share certificates are similar to CDs that banks offer, except only a credit union member can invest their money in a share certificate for a fixed term and earn interest on their investments. 

The primary difference between share certificates and CDs is that share certificates are exclusive to credit union members.

Pros of Share Certificates

Share certificates offer some advantages over other types of investments. For example:

  • Better interest rates: Share certificates rates generally yield a higher interest rate than a traditional savings account or bank CD. This means you might be able to grow your investment faster if you use a share certificate.
  • National Credit Union Administration (NCUA) Insurance: Just like bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC), funds invested in share certificates at a federally insured credit union are also protected. You can trust you’ll have protection for up to $250,000 per depositor through the National Credit Union Administration (NCUA).

Cons of Share Certificates

Potential drawbacks to share certificates include:

  • Limited availability: Since only credit union members can access share certificates as an investment tool, if you’re not a member or don’t qualify for membership at a local credit union, sharing certificates might not be an option.
  • Early withdrawal penalty: Like CDs, withdrawing funds from a share certificate before the maturity date will result in penalties. Consider the long-term implications of tying up your money in a share certificate before you commit the funds.

What are CDs?

How does a certificate of deposit work? Certificates of deposit (CD) is a type of investment tool offered by banks and financial institutions. CDs let you invest your money for a fixed period — usually ranging from a few months to several years — in exchange for earning interest on the year deposited amount. Most often, the longer you invest the money, the higher your interest rate will be.

CDs are a popular tool for people looking for low-risk investment opportunities with guaranteed returns. In addition, they offer a stable source of income and can preserve your principal investment.

Pros of CDs

Some of the pros of CDs include:

  • Security: CDs are considered one of the safest investments. They’re FDIC insured for up to $250,000 per depositor.
  • Predictability: Unlike stocks or other volatile investments, CDs offer a predictable return. Their fixed interest rate won’t change throughout their term, which means you know exactly how much you’ll earn when they mature.
  • Variety of terms: CDs offer several terms ranging from 3 months to 5 years or more. You’ll likely find something that suits your needs and your timeline.

Cons of CDs

Of course, there are some cons to CDs, including:

  • Limited liquidity: If you need to access the funds in a CD before your maturity date, you’ll likely have an early withdrawal penalty fee that results in a loss of earned income or even some of your principal balance, depending on the bank’s policy.
  • Inflation risk: The fixed interest rate on a CD might not keep up with inflation. This could erode the purchasing power of your investment over time.
  • Lower returns: CDs are low-risk investments but also offer lower returns than many other investment options, like stocks or bonds. You might miss out on higher earnings if you only invest in CDs.

Share Certificates vs CD: Key Differences

If you’re comparing share certificates vs CDs, you should understand a few things. First, both investment options are designed for investors seeking a low-risk way to grow their money over time. There are some critical differences between the two as well.

  • Liquidity: Liquidity refers to how quickly you can turn an asset into cash without affecting its market price. Both share certificates and CDs have limited liquidity compared to other investment options, like stocks or bonds. They each require you to commit your funds for a specified term. That said, CDs typically have more restrictions on early withdrawals than share certificates offered by credit unions will.  
  • Interest rates: The interest rates offered on both share certificates and CDs will play a significant role in determining how attractive they are to investors. Generally, credit unions tend to offer a bit higher interest rates on share certificates than banks do on CDs.
  • Investment risk: Share certificates and CDs are both considered relatively safe choices when considering investment risk. They’re  both insured by federal agencies for up to $250,000 per depositor, which ensures the principle of your investment is protected. Ultimately, each is a low-risk choice for conservative investors.

Other factors to consider include: 

  • Membership requirement: Share certificates are only an option for credit unions members.
  • Customer service: Credit unions are known for their personalized customer service and community-oriented approach to business. This can make them more appealing than larger banks for some people.
  • Fees and penalties: Fees and penalties are a concern for most investors. As noted, CDs can have a higher early withdrawal penalty than share certificates.

How to Open a Share Certificate Account at Island Federal Credit Union

Island Federal Credit Union is an excellent place to open a share certificate. Our competitive rates and personalized services make opening your share certificate account simple. 

To open your share certificate account, just follow these steps:

  • Learn about membership requirements if you’re not already a credit union member.
  • Get together all the necessary documents, which can include:
    • A valid government-issued ID like a driver’s license or passport
    • Your Social Security number or Individual Taxpayer ID Number (ITIN)
    • Proof of address like a utility bill, lease agreement, or mortgage bill
  • Decide on your certificate term and investment amount. Remember that the longer the time, the higher the interest rate.
  • Open your share certificate account by funding the certificate with the desired amount.

Final Thoughts

As we look at the key differences between share certificates vs CDs, it’s clear that these investment options are safe opportunities with individual benefits and drawbacks. Ultimately, you should decide based on your risk tolerance, financial goals, and whether or not you’re already a credit union member.

If you’re interested in opening a share certificate account at Island Federal Credit Union, contact us today to learn more about how to get started. Apply online to open your account today.