What is a Share Certificate and How Do They Work?

As you research different ways to grow your savings, you may have noticed that Patelco and other credit unions offer share certificates. A share certificate lets you earn a higher dividend or interest rate than with a CD from a bank, with a guaranteed return for a set term (such as 11 months). Here’s how share certificates work and why they might be a good investment strategy for you.

What is a share certificate?

A share certificate, which is issued by a credit union, is similar to a certificate of deposit (CD) issued by a bank. When you have a share certificate, you deposit a fixed amount of money for a specific time (term), and your credit union agrees to pay a fixed dividend (interest) rate on your initial deposit. The fixed dividend rate and annual percentage yield (APY) depend on your deposit amount and the term length.

The dividends are shares of the credit union’s profits. (Credit union members, or depositors, are part owners of the credit union.) The fixed dividend rate is used to calculate how much interest the share certificate earns each month. The APY is the effective annual rate of return based upon the dividend rate and includes the effect of compounding interest.

And if you take money out before the end of the specified term, you’ll likely have to pay an early withdrawal penalty.

Share certificates vs. CDs

The key difference between share certificates and certificates of deposit (CDs) is that share certificates are only issued by credit unions and CDs are only issued by banks. Both accounts have fixed rates for set term lengths, and both have a potential early withdrawal penalty.

Share certificates and CDs are both insured for up to $250,000 (up to $500,000 for joint accounts).

How do share certificates work?

When a credit union member deposits a certain amount of money into a share certificate account, the account earns dividends according to the terms of the agreement or contract. Dividends are compounded daily or monthly and credited at maturity when the term is less than a year, or monthly when the term is one year or more.

Here is how the same opening deposit of $1,000, with the same 2.96% dividend rate (and 3.00% APY) grows over different term lengths.

• A 3-month term makes $7.42 over its lifetime – for an ending balance of $1,007.42.
• A 24-month term makes $60.90 over its lifetime – for an ending balance of $1,060.90
• A 60-month term makes $159.40 over its lifetime – for an ending balance of $1,159.40.

See the percentage rates and APY for our share certificates.

Share certificate: what’s in a name?

A share certificate is similar to a stock certificate. It’s a legal document showing that you own a share of ownership in your credit union.

What is an IRA share certificate

An IRA share certificate combines an individual retirement account (IRA) with a share certificate. It’s a tool to save for retirement when market volatility may be a concern, perhaps during uncertain economic times.

Simply put, an IRA share certificate lets you invest a fixed amount for a fixed time period and earn a fixed rate of return, with all the tax benefits of a typical IRA.¹

Benefits of share certificates

A share certificate offers a higher fixed dividend rate than regular savings accounts, so it can be a good investment strategy if you have extra money for investing and don’t need to keep your money liquid.

A share certificate is considered a safe investment because it is insured by NCUA, so there’s no risk of losing money unless you withdraw early.

If you’re wondering if a share certificate from Patelco is a good choice for you, get personalized financial advice or open a share certificate account today.