If you’re an investor, your biggest consideration on investing is what sort of return you can get on your money. Obviously investors want to put their money into investments that offer the highest returns. Another factor they consider is risk. High risk is ok, but you want to balance those investments out with low risk investments. For this reason investors usually have a fair amount of money in CDs. Bank CD interest rates are the highest form of FDIC insured investment you can make. This is why they are so popular.
Obviously the bank CD rate being offered at a bank is the biggest factor to consider when opening a CD. The two main factors that affect a CD interest rate is the interest rate environment which is usually mainly affected by the Federal Reserve, and the length of the term of the CD. Banks will offer higher interest rates on long term CDs over short term ones. This is because giving your money to a bank for a longer period of time gives the bank more freedom on ways to make money with your money. Just because long term CDs offer higher interest rates doesn’t mean these are the only CDs that investors go for. You have to consider the interest rate environment. If interest rates are low, as they are now, it doesn’t make much sense to lock into a long term CD.
When interest rates are low investors will usually invest in short to mid term CDs. Then when the interest rates start to pick back up they’ll move to longer term CDs. CD laddering is also a popular technique. Investors will initially invest in 1, 2, 3, 4, and 5 year CDs. Then as each CD matures he will reinvest the money into a 5 year CD. This way the investor has a CD maturing every year, he’ll be getting 5 year interest rates on his CDs, and he’ll get the average interest rate environment over the long haul.