Q: I know about CDs as far as investments are concerned, but what is a brokered CD?

A: Brokered CDs, like brokered deposits, take advantage of pooled buying power to negotiate higher interest rates.

Brokered CDs carry all the usual trappings of a bank certificate of deposit. You agree to park your money in an account for a specific length of time (maturity period). In return, the bank offers you interest, usually at a higher rate than a savings or money market account. The longer you leave the money in the account, the greater the interest rate.

Brokerage firms offer banks large amounts of money and long maturity periods in exchange for higher-than-average interest rates. The broker then sells pieces of the CD to individual clients.

Unlike regular bank CDs, portions of brokered CDs may be sold to another party. This allows investors to cash out their accounts prior to the maturity date without a penalty. Be aware that the secondary market for brokered CDs is fairly thin. If you want to get out of a CD because rates have gone up, it may be difficult to find a buyer for a poorly paying CD.

There are certain aspects of a brokered CD that increase investment risk. CD brokers are not regulated, so make sure to buy CDs from reputable sources (check out your broker on this page).

Find out what bank is issuing the CD. FDIC insurance covers brokered CDs in most cases, but you are only covered up to $250,000 at any given institution. If you have additional accounts through the issuing bank, those values will be subtracted from the CD value for FDIC insurance.