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How Do Share Certificates Work?

Share certificates are savings accounts that offer the long-term growth potential of stocks or bonds with almost none of the risks. Let’s take a closer look at how this unique investment tool can help you build long-term wealth safely.

THE SHARE CERTIFICATE DIFFERENCE

Share certificates are “term” savings accounts offered by credit unions. While they might not be as glamorous as the latest hot stock, share certificates offer reliable, guaranteed returns with a level of security you won’t find with other investments.

Here we consider how share certificates work and why you should think about including them in your savings portfolio.

WHAT IS A SHARE CERTIFICATE?

A share certificate is a special type of savings account where you invest money for a set term or period of time rather than having your cash instantly available. In return, you earn regular fixed dividends, paid out along with your original investment when your certificate “matures.”

HOW DO SHARE CERTIFICATES WORK?

Share certificates offer members of credit unions significantly higher interest rates than a conventional savings account but in a more structured package. 

Your money is invested in a share certificate for a term anywhere from three months up to five years. During this time your money earns regular dividends based on a fixed interest rate. These dividends are usually reinvested along with your principal.

Share certificates generally pay significantly better dividends than other savings accounts, with long-term certificates typically earning more. 

Share certificates generally require a larger minimum deposit, typically of $500 or more. Unlike regular accounts, you cannot access this money until the certificate matures unless you’re willing to pay a penalty and in most cases lose any dividends your money might have earned.

On the plus side, when you invest in a share certificate, you know up front exactly how much you’ll earn and when you’ll get your money back. 

And, because your principal has been untouched and dividend payments have compounded over this time, your money can grow more quickly than in a regular deposit account. 

Share certificates are insured by the federal government through the National Credit Union Administration (NCUA) for up to $250,000 per account, just as regular savings accounts are. 

This means that money invested in a share certificate earns guaranteed interest while being fully insured against loss of principal, making this among the safest and most predictable ways to invest your money.

SHARE CERTIFICATES VS. CDS

You might have heard about certificates of deposit (CDs) and wondered how these differ from the share certificates offered by credit unions.

Put simply, share certificates and CDs are both fixed-term deposits that earn regular payments based on a fixed rate of interest. These payments are paid out along with your original investment as a lump sum on maturity.

Payments made on share certificates are known as dividend payments because, as members of a credit union, share certificate investors are actually co-owners of the total assets of the union and share directly in the proceeds from investments.

By contrast, investors in a bank’s certificates of deposit simply earn an agreed rate of interest on their principal that is separate from any dividends the bank might pay its actual shareholders.

CREDIT UNIONS VS. BANKS

In reality, because interest rates are fixed and agreed on ahead of time, there is very little practical difference between share certificate dividends and interest payments on a CD. 

That said, there are significant differences between being a member of a credit union and a customer of a bank that make investing in a share certificate versus a CD a very different experience.

For starters, as a credit union member, you are both an investor and a joint owner of a financial cooperative—therefore you are getting the full benefit of investments made on your behalf. 

In many cases, that means dividend yields are significantly higher than the interest rates paid by commercial banks. 

LOCAL CONNECTIONS MATTER

In addition, when you join a credit cooperative like GHS Federal Credit Union, you become part of a local community that thrives when more of its members reach their financial goals.

Along with better rates and lower fees, you’ll find financial experts willing to take the time to understand where you are coming from and where you want to go. 

With deep roots in the Southern Tier of New York State, we offer friendly service, great local knowledge, and all the financial products you need to succeed—from free-checking accounts to a great range of high-earning share certificates.

GHS FCU is also surprisingly easy to join! These benefits and many others are available to anyone who lives, works, attends school, or worships in Broome, Chenango, or Tioga counties. 

SHARE CERTIFICATE PROS AND CONS

Still not sure if a share certificate is right for you? Let’s break down the advantages and potential disadvantages of this type of savings account. 

Advantages

Share certificates offer some big pluses for committed investors, including:

  • Better dividend rates than regular savings accounts

  • Fixed interest rates

  • Predictable, guaranteed earnings 

  • A range of terms to suit your needs

  • No monthly fees

  • Dividends are taxable as regular income rather than capital gains

Disadvantages

That said, share certificates have some potential disadvantages that might not make them the best choice for every investor. These include:

  • Higher initial investment amount than regular savings accounts

  • Your money is not available until the certificate matures

  • Dividend earnings might not keep up with inflation

  • You might be locked into a lower interest rate if market rates rise quickly

  • High fees and lost dividends if you withdraw money early

WHEN SHOULD YOU OPEN A SHARE CERTIFICATE?

Share certificates bring structure, predictability, and reliable earnings to a savings portfolio, but it’s important to know when it makes sense to open this type of account.

You’ll usually need $500 or more to invest in a share certificate, and you’ll want to be sure that you can do without access to that cash for the full term of the certificate. 

That makes share certificates a good choice for organized savers who already have at least a small lump sum set aside from their monthly budget and expenses. Let’s take a look at some examples.

SAVING FOR A GOAL

If you’re saving for a short- to medium-term goal like a car down payment, home improvement, or a milestone event like a wedding or anniversary celebration, a share certificate provides a great way to do it!

You’ll get a structured way to save towards your goal, and you will know exactly how much you will earn and by when, so you can plan ahead. You’ll also know your hard-earned savings are invested safely with insurance backed by the federal government.

STEPPING STONE

Saving is never easy but turning a small nest egg into an enduring asset can be particularly challenging. If you’re looking to build a lump sum that you can use to help pay for a college education or fund your retirement, then a share certificate can provide a great stepping stone.

If you’re not ready to invest in a dedicated retirement or educational savings account, investing and reinvesting in successively longer-dated share certificates can help you build wealth safely while still keeping your money relatively accessible. 

INFLATION PROTECTION

High inflation can be a threat to savings of any form. The higher interest rates offered by share certificates can help to offset the loss of spending power that higher inflation brings.

If you have a significant lump sum you need to protect, investing in a share certificate with a term that suits your needs will provide some protection of your money’s value while offering guaranteed returns and the highest level of security.

BUILD WEALTH WITH A GHS SHARE CERTIFICATE

A GHS FCU share certificate can help you build a savings nest egg into a sizable asset you can use to achieve your financial goals. 

GHS FCU share certificates offer:

  • Great dividend rates to grow your savings

  • A range of terms to meet your needs

  • Minimum payments as low as $500

  • Predictable, guaranteed returns

  • Fully insured by the NCUA up to $250,000

Contact us today for more information, or click below to learn why you should open a share certificate with a credit union.

ARE SHARE CERTIFICATES WORTH IT?


Savings Accounts, Blog NavGuest UserJuly 24, 2023Savings Account, Financial Wellness, Education
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Your savings federally insured to at least $250,000 and backed by the full faith and credit of the United States Government National Credit Union Administration, a US Government Agency.
© GHS Federal Credit Union. All Rights Reserved. Privacy Policy
*APR = Annual Percentage Rate. Rates are shown "as low as". Rates and terms are subject to change. The rate and term may vary depending on each individual's credit history and underwriting factors. Credit Union Membership required with a $1.00 minimum deposit and $1.00 membership fee. Rate shown as low as with discount up to 0.50% for Auto Loans. Rate shown as low as with discount up to 0.25% for Personal Loans and Home Equity Loans.
**APY = Annual Percentage Yield. Rates are subject to change at any time. Early withdrawal penalties may be imposed on Term Share Accounts. Credit Union Membership required with a $1.00 minimum deposit and $1.00 membership fee.
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