Definition of certificate of deposit is a financial instrument issued by a financial institution that offers a fixed return in a specified period of time.
The client of this institution invests their capital in it with a higher profitability than that of a commercial deposit. Certificates of Deposit began to be issued by US commercial banks in 1961.
In addition, there is a secondary market where this financial security can be exchanged. In it, the investor can sell the securities before maturity. While it is true that liquidity is less than that of other types of assets (such as shares).
Characteristics of certificates of deposit
The issuance of a certificate of deposit requires that it be attractive in terms of profitability over time. So that the agents that issue it can capture liabilities and convert them into loans. Loans that are offered at a higher interest rate, so that there is a business margin or a profit margin for the financial institution.
Today, trading certificates of deposit is rare, except in some Latin American countries where it is still a very active business. The fact that they are traded less is that there is great financial engineering with an important variety of very attractive products. Which, for the investor, causes greater competition and that they can opt for other types of financial products. In addition, there is great expertise on the part of financial intermediaries and companies to create new products and negotiate their cash flow peaks where the distribution channels are private and, therefore, they also take market share away from large commercial banks.
In Europe, very few certificates of deposit are traded and those that are traded are issues of ADRs or certificates of deposit of shares on companies that have a presence in Latin America and that are listed in these countries.