Is a Share Certificate the Same as a CD?
Navigate the world of fixed-term savings. This guide clarifies the nuances between share certificates and certificates of deposit.
Individuals often seek stable avenues for their savings that offer returns beyond traditional checking or savings accounts. Fixed-term savings vehicles, designed to hold funds for a set period, are popular choices for this purpose. While both serve a similar function of locking in funds for a specified duration to earn returns, their fundamental differences stem from the types of institutions that offer them.
Understanding Certificates of Deposit
A Certificate of Deposit (CD) functions as a savings certificate that holds a fixed maturity date and a fixed interest rate. These financial products are predominantly offered by banks, providing depositors with a predictable return on their principal. CDs are characterized by a set term, which can range from a few months, such as three or six months, to several years, commonly one, three, or five years.
The interest rate on a CD is typically higher than that of a standard savings account. Funds deposited into a CD are generally inaccessible until the maturity date without incurring a penalty. This early withdrawal penalty often involves the forfeiture of a portion of the accrued interest.
A significant aspect of CDs is their security, particularly when held at banks insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC insures deposits up to $250,000 per depositor, per FDIC-insured bank, for each account ownership category. This coverage extends to both the principal amount and any accrued interest, providing a safeguard for depositors in the event of a bank failure.
Understanding Share Certificates
A Share Certificate is a type of savings account offered exclusively by credit unions. This financial product allows credit union members to deposit a sum of money for a fixed period at a fixed rate of return. Similar to CDs, Share Certificates come with defined terms, which can vary from short periods of a few months to longer durations of several years.
Instead of earning “interest,” Share Certificates pay “dividends” to their holders. This distinction in terminology reflects the cooperative structure of credit unions, which are member-owned and not-for-profit organizations. As with CDs, accessing funds from a Share Certificate before its maturity date typically results in an early withdrawal penalty, which may entail forfeiting some of the earned dividends.
The security of Share Certificates is provided by the National Credit Union Administration (NCUA). The NCUA insures deposits at federally insured credit unions through the National Credit Union Share Insurance Fund (NCUSIF). This insurance protects members’ deposits up to $250,000 per depositor, per federally insured credit union, for each account ownership category.
Key Distinctions and Commonalities
The primary distinction between Certificates of Deposit and Share Certificates lies in the financial institutions offering them. Certificates of Deposit are provided by banks, which are typically for-profit entities. In contrast, Share Certificates are exclusively offered by credit unions, which operate as not-for-profit, member-owned cooperatives.
Another difference is the terminology used for the returns generated. Banks pay “interest” on Certificates of Deposit, reflecting their traditional lending and profit-making model. Credit unions, due to their cooperative structure, pay “dividends” on Share Certificates, distributing earnings back to their members.
Regulatory oversight and deposit insurance also differentiate these products. Deposits in banks, including Certificates of Deposit, are insured by the Federal Deposit Insurance Corporation (FDIC). Conversely, Share Certificates held at credit unions are insured by the National Credit Union Administration (NCUA). Both agencies provide equivalent coverage, protecting up to $250,000 per depositor, per institution, per ownership category.
Despite these distinctions, Certificates of Deposit and Share Certificates share several fundamental commonalities. Both require funds to be held for a fixed term, ranging from short to long periods. They both offer predictable, fixed returns. Additionally, both financial products typically impose penalties for early withdrawals.