Investment Certificate
From Wikipedia, the free encyclopedia
- This article is specific to the United States.
An investment certificate is an investment product offered by an investment company or brokerage firm designed to offer a competitive yield to an investor with the added safety of their principal. [1]
A certificate allows the investor to make an investment and to earn a guaranteed interest rate for a predetermined amount of time. The product rules and specifics can vary depending on the company selling the certificates.
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[edit] History
The investment certificate was first introduced to the public in 1894 by John Tappan of Investor's Syndicate. Investor's Syndicate marketed the product as a Face Amount Certificate. It allowed the investor to deposit a selected sum of money into the certificate and in turn the investor would receive a guaranteed interest rate after a predetermined amount of time. After the selected length of time had passed, or at maturity the principal and interest was returned to the investor.
[edit] Product terms
Depending on the financial institution, certificates can offer various different term options. Some certificates can be very liquid allowing for frequent deposits and/or withdrawals without penalty. Other certificates may more closely match the typical rules of a certificate of deposit. Allowing the investor to select a term length (typically between 3 months to 3 years) and earn a guaranteed interest rate. These certificates are flexible and allow add-on payments during the term or withdrawals up to a specified amount without a charge. There are also certificate products which feature an interest rate that is tied to the stock market, namely the S&P 500 index. While each certificate product has its own rules they all have one common factor, security of the investor's principal.
[edit] Tax-deferred certificates
Some investment certificates are tax-deferred. The investor deposits a single lump sum of money into the certificate to earn a guaranteed interest rate. Most tax-deferred certificates do not allow add-on payments or partial withdrawals. The interest earned in such certificates grow tax-deferred, much like an Individual Retirement Account (IRA). All certificates must have a maturity date, typically 20 to 30 years from the time of deposit; the maturity date is the point at which the certificate can no longer renew and must be cashed in. With tax-deferred certificates this means at the point of surrender all interest earned in the account is reportable and taxable in that year. Many investors will hold onto tax-deferred certificates for the full length of time and the interest earned can be quite substantial. At the time of surrender, the interest earned would create a large tax liability to the investor. To help with this, many companies offer what is referred to as options. Some option' allow the investor to take only a portion of the account out per year to help spread the tax liability through several tax seasons.
[edit] Difference between an investment certificate and CD
A certificate is an investment product unlike a certificate of deposit (CD) offered by a banking institution. Being an investment product, it is not federally or FDIC insured.[1] Surrenders from a certificate, unlike a certificate of deposit must be reported to the Internal Revenue Service on the individual investor's tax returns. These surrenders would be shown on a 1099-R form for retirement accounts or a 1099-B for non-retirement accounts.[2] Certificates also typically have lower surrender charges if the money is withdrawn early compared to certificates of deposits and feature a longer grace period between terms (generally between 14-16 days)[3].
