Market-Linked CD

Commercial banks and other financial institutions offer investment strategies such as certificates of deposits. Market-linked CDs present more options than a traditional certificate of deposit. With traditional CDs, the interest rate that is earned is at a standardized set amount. In other words, the interest is at a fixed-rate at the time of purchase. Market-linked CDs, however, give the investor the opportunity to invest in CDs that offer flexible interest adjustments. The interest rates that market-linked CDs pay their investors are directly associated with the Dow Jones and the S&P 500 averages. If the average interest rate goes up with these markets, so will the market-linked CD.

Market-linked CDs are also tied directly to commodities, currencies and the CPI, also called the Consumer Price Index. Investors also have the opportunity to invest in certain areas that would otherwise be too difficult to get in to. Market-linked CDs are also backed by the FDIC, which presents a value of security and insurance that is attractive to a lot of investors. One big advantage that market-linked CDs have is the ability to receive the total principal back that is invested regardless if the markets fall or not. This fact alone presents insurance and dependability when investing.

Investors should be aware of a few more advantages that market-linked CDs provide. Since they are insured by the FDIC, investors are ensured that they will see 100% of their principal investment up to $250,000. After the first year, $100,000 is insured by the FDIC. Basically, market-linked CDs provide the same amount of security as a traditional savings account would. Investors who invest in the stock market are taking a chance of losing their investment. With market-linked CDs, the investment is secure and the risk is extremely minimal if any at all. As long as the investor doesn’t make a withdrawal before the maturity date of the market-linked CD, they are guaranteed their principal back in full.

Another advantage with market-linked CDs is the fact that the investment is locked up for the duration of the contract. Traditional CDs also have this effect that prevents investors from buying and selling. In this case, the lack of liquidity benefits the investor. There are disadvantages as well when investing in market-linked CDs. Whether or not these disadvantages outweigh the advantages will totally depend on the investor’s goals. Like all investments, investors should be aware of the disadvantages that are associated with market-linked CDs before they decide to make an investment.

The first disadvantage is an early withdrawal penalty. The investor’s principal investment is guaranteed 100%, unless the investor makes an early withdrawal. Another disadvantage is the fact that market-linked CDs experiences higher tax rates than traditional CDs. All returns are considered interest and the returns that market-linked CDs produce are not considered long term investments. All income that is generated from market-linked CDs must be reported for tax purposes as well. Investors should also know that some MLCDs have a cap on how much the investor can earn.

Investors who don’t like dealing with tax figures such as these should avoid market-linked CDs. Other investors who don’t want to deal with earning caps will take the time to research which market-linked CDs don’t impose these regulations. Paying higher taxes and being capped with how much of a return an investor can make are the two biggest factors that can drive away future investors. However, if the investor spends the time to do their research, they can avoid limited earnings and use other strategies to minimize the amount of taxes they will need to report. Investors who are looking for higher levels of security in CDs are advised to get familiar with market-linked CDs.

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