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Investment certificates are products offered by a broker or some type of investment company. A certificate of this type makes it possible for an investor to deposit a specific amount of money into the transaction and earn a rate of interest over the life of the investment. The amount of interest earned will vary, depending on the terms and conditions associated with the particular form of investment certificate.
The concept of an investment certificate is believed to have originated during the latter part of the 19th century. An organization known as the Investor’s Syndicate issued a product that was known as a face amount certificate. The terms associated with this product were very simple. An investor would purchase the certificate, receiving a guaranteed rate of interest as part of the deal. Upon the maturity of the product, the investor received both the accrued interest and the principal. In the interim, the Syndicate was free to use those funds for its own financial goals.
Today, there are a number of different investment certificate products available to investors. Some are set up as guaranteed investment certificates, with the terms often including a fixed rate of interest that is paid during or at the end of the life of the product. Other forms of the guaranteed investment certificate offer a variable rate of interest, with the prevailing rate determined by the current interest rate in general use.
An investment certificate often requires that the investor not touch the principal amount during the life of the product. There are exceptions in which the investor may withdraw a portion of the principal at specific points prior to maturity, usually at a point when interest is calculated for a given period. When withdrawals are discouraged, the investor often pays penalties for the early withdrawal.
While there are similarities between an investment certificate and the certificates of deposit, or CDs, that are commonly offered by banks, the two financial products are not the same. One important aspect is that an investment certificate is classified as an investment, so it is not usually insured by a government entity, as is the case with a CD. Surrenders from an investment certificate must also be reported to tax agencies as investment income, a policy that does not apply to a CD. Penalties for early withdrawal are generally lower with an investment management certificate than with a CD, a factor that can help offset the lack of insurance by the government.