Investment certificate

: "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. [ [http://www.law.uc.edu/CCL/InvCoAct/sec28.html Section 28 - Face-Amount Certificate Companies ] ]

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.

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.

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.

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 theinvestor to take only a portion of the account out per year to help spread the tax liability through several tax seasons.

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. [http://www.ameriprise.com/amp/global/docs/certificate/6000.pdf] 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. [http://www.irs.gov] 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) [http://en.wikipedia.org/wiki/Certificate_of_deposit] .

References

* [http://www.law.uc.edu/CCL/InvCoAct/sec28.html Investment Company Act of 1940]
* [http://www.irs.gov IRS]
* [http://www.sec.gov Securities and Exchange Committee]
* [http://www.ameriprise.com/amp/global/docs/certificate/6000.pdf Ameriprise Certificate Prospectus]