What is a brokered CD — and should you invest in one?

Brokered CDs can be a convenient option if you already have a brokerage account. Instead of opening a new CD account at a bank, you simply log in to your existing investment account and purchase a CD like any other security.

You still get federal deposit insurance and a fixed interest rate with brokered CDs, plus the benefit of being able to sell it if you ever need your money before maturity.

But they’re not for everyone. Brokered CDs and bank CDs have some stark differences, so make sure you understand how they work before purchasing.

What is a brokered CD?

A brokered CD is a certificate of deposit you buy through a brokerage firm, instead of from a bank or credit union. Like traditional CDs, you choose a term length that comes with a set interest rate. But unlike with regular CDs, you can buy them through your investment account either new or “used” from other investors.

Newly issued CDs are those purchased directly from banks, whereas brokered CDs also can be bought on the secondary market. Secondary CDs are those sold by other investors who need their funds before maturity). Rather than pay a penalty to withdraw their money, as you would with a traditional CD, investors unlock their money by trading these CDs to other investors at rates that depend on the market, much like a bond.

The biggest benefit of buying a brokered CD is that you might find stronger interest rates than those at your own bank. For example, a 12-month brokered CD with Vanguard earns a 5.40% yield at the time of publishing. And some brokerage firms — like Fidelity and Vanguard — offer fractional CDs at increments as low as $100 (though minimum investment amounts apply).

How does a brokered CD work?

Brokerage platforms often offer brokered CDs in increments of $1,000, although amounts can vary by firm. And terms can range from short one-month certificates to those of 20 years or more.

Brokered CDs don't charge withdrawal penalties in the same way that traditional CDs do. Instead, if you aren’t able to keep your money locked for the certificate’s entire term, you must sell your CD on the secondary market.

Note the potential costs involved in selling your CD. For one, you may not be able to trade your CD at the same interest rate. Rather, the price you receive when trading a CD on the secondary depends on current interest rates and buyer demand — meaning, whether anyone is willing to buy it:

• If interest rates have risen since you bought your CD, investors may not be interested in buying it on the secondary market because they can earn a higher yield with a newly issued CD. In this case, you’d lose money by selling your CD at a discount.

• If interest rates have dropped and your CD now offers a higher-than-usual yield, you might be able to sell it to another investor at a premium.

Unlike traditional CDs, interest on brokered CDs does not compound: You earn simple interest in installments — monthly, twice annually or on another set schedule. Some brokerage platforms also charge a transaction fee or commission to sell your CD.

Brokered CDs do not automatically renew like traditional CDs can. After your CD matures, your initial investment and any earned interest are returned to your settlement fund. At this point, you choose whether to reinvest in another CD, invest the money elsewhere or withdraw it for other uses.

Brokered CDs are federally insured up to $250,000 per bank, yet you can expand that FDIC coverage by purchasing CDs from multiple banks through your brokerage account — another benefit if you’re investing more than $250,000.

Why are brokered CD rates so high?

When you buy a CD directly from a bank, the bank sets the interest rate and that’s that. As an individual investor, you don't have much negotiating power to influence a higher rate.

When a brokerage firm buys CDs, they're bringing a much larger sum of money to the table, which gives them more leverage to negotiate stronger rates with banks.

Think of it like buying in bulk at a wholesale store. When you buy a large quantity of something, you can often get a better price per unit than if you were buying just one or two items at a retail store.

In the case of brokered CDs, the brokerage firm is buying a large "bulk" amount of CDs from various banks — called a master CD. Then, when you buy a brokered CD through your brokerage account, you're essentially buying a piece of that master CD the brokerage firm negotiated.

Dig deeper: I'm a personal finance expert: Here's why you need to invest in a CD today

Benefits of brokered CDs

• Wider term options. CD terms from a bank typically range from six months to five years. But with brokered CDs, you can choose from terms of one month to 20 years. This level of customization can come in handy when building a CD ladder.

• More flexible access to your money. Unlike traditional CDs that charge early withdrawal penalties, you can withdraw your money from a brokered CD at any time by selling it to another investor on the secondary market (albeit with potential risks).

• Potentially higher yields. Interest rates on brokered CDs tend to be higher than those for traditional CDs — though not always, so it’s worth shopping around with online banks or digital CDs for stronger interest rates.

• Streamlines your brokerage accounts. Rather than opening a new account at a bank, you can buy a brokered CD directly in an investment account you already own. And if you need to deposit more than $250,000, buying CDs from multiple banks within your account helps you maintain the maximum federal insurance coverage.

Drawbacks of brokered CDs

• Earns simple interest. Interest doesn’t compound on brokered CDs like it does with traditional CDs. Instead, you earn simple interest on a set schedule, like monthly, quarterly, twice annually or at maturity. If you want that interest to compound, you have to reinvest it yourself.

• Secondary market risk. If you hold your CD until maturity, you’re not at risk of losing your initial investment. But if you need your money early, you may face a loss on the secondary market if you have to sell it at a discount.

• Some CDs are “callable.” With brokered CDs, a bank may “call” — or terminate — the CD before it matures, giving you back your initial deposit and any interest earned before closing the account. (To avoid this situation, focus on noncallable CDs.)

• Potential sales fees. In exchange for higher interest rates, some brokered CDs charge transaction costs you won’t find on a traditional CD. Fees depend on the brokerage and its services.

How to find and buy brokered CDs

If you already own a brokerage account, buying a brokered CD can be as simple as a few clicks online, allowing you to manage your CD investments alongside your other holdings.

If you don’t already own an investment account, it’s easy to open one with a reputable brokerage firm like Vanguard, Fidelity or Charles Schwab.

Once you’re an owner, you’ll want to research available brokered CDs offered by your brokerage platform, comparing factors that include:

• Interest rates. Narrow down the highest yield possible for the term length you’re interested in.

• Callable vs. noncallable. Rates can depend on whether you’re OK with the issuing bank “calling” your CD before maturity or prefer knowing you’ll hold your CD until maturity.

• Minimum deposits. The required amount for your initial investment may be larger than those for traditional CDs — $1,000 or more with many brokerages.

• Fees and commission. You won’t typically pay a fee to buy a newly issued brokered CD, though many firms charge transaction fees to trade CDs on the secondary market. You might also pay a commission fee, depending on your broker.

After you've found a brokered CD you like, make sure you have enough funds in your settlement account to cover the purchase and then place an order for your brokered CD through your account.

Dig deeper: When is it worth it to break a CD? A finance expert's take on early withdrawals and breaking even

Alternatives to a brokered CD

If you’re looking to earn higher yields on your savings, brokered CDs aren’t the only way to do it. Consider other options with high returns on your investment.

• Traditional bank-issued CDs. Many traditional certificates of deposit require no minimum deposit and can offer stronger yields than brokered CDs if you buy them from an online bank or fintech company.

• High-yield savings accounts. It’s a good idea to keep your nest egg and emergency funds in a high-yield savings account. You can access your money at any time, and you can earn high APYs that can be just as good as some brokered CDs. The main disadvantage is that the rates aren’t locked in, so they can change at any time.

• Money market account. Rates on money market accounts are similar to HYSAs, but with the perk of debt and check-writing privileges with limits.

Dig deeper: High-yield savings account vs. CD: What to know when rates are high

Frequently asked questions about brokered CDs

Learn more about how brokered CDs work and whether they’re a fit for your budget and financial goals.

What’s the difference between a brokered CD and a traditional CD?

The main difference between a brokered CD and a traditional CD lies in how you buy them. You purchase brokered CDs through brokerage firms or independent salespeople, while you buy traditional CDs directly from banks or credit unions.

What happens if you need to withdraw your money early is different, too. With traditional CDs, you pay an early withdrawal penalty if you need your money before maturity. But with brokered CDs, you must sell them on a secondary market to access your money early, which comes with risk of losing money if the traded rate is lower or you have to pay costly fees or commission.

Can brokered CDs lose value?

Yes, but a brokered CD typically won’t lose value unless you need to sell it before maturity on the secondary market. In this case, you can receive more or less than your original investment depending on prevailing interest rates and market demand.

Are brokered CDs better than bank CDs?

Not necessarily. Rather, it depends on your financial goals. Brokered CDs may be better if you want an unusually long term — like 15 to 20 years — or you’d like to deposit more than $250,000 into CDs, in which case you can invest with multiple banks from one single account, each CD fully covered by federal deposit insurance. Beyond that, online bank CD rates can be just as competitive with no or low minimum deposits compared with the typical $1,000 opening investment for brokered CDs.

Sources

Brokered CDs: Investor Bulletin, U.S. Securities and Exchange Commission. Accessed May 24, 2024.

About the writer

Cassidy Horton is a finance writer who specializes in banking, insurance, lending and paying down debt. Her expertise has been featured in NerdWallet, Forbes Advisor, MarketWatch, CNN Underscored, USA Today, Money, The Balance and Consumer Affairs, among other top financial publications. Cassidy first became interested in personal finance after paying off $18,000 in debt in 10 months of graduation with an MBA. Today, she's committed to empowering people to stand up and take charge of their financial futures.