A certificate of deposit is not a physical piece of paper issued by a bank or credit union. It is an account set up under certain terms. The basic elements include the amount of deposit, the rate of interest (or return), the frequency of calculating interest, and the time frame (or term) marking the duration of the account. The deposited money and its earnings are typically "locked away" from the investor until the maturity date.

For a basic CD, the term is a predetermined period of time, such as three months, six months, one year, or five years. In exchange for not withdrawing the investment or earnings during the term, the investor receives a fixed rate of interest – an interest rate that does not change for the entire period. Sometimes, a minimum deposit amount is required, with larger deposits paying higher interest rates.

Penalty fees usually keep investors from withdrawing money from the account before the agreed-upon date. Because the bank often uses money from CD accounts to perform other activities, such as lending, the bank is in a difficult position if asked to return the money early. Penalty fees compensate the bank for drawing from other funds to pay the investor before the end of the term.

Not only is the rate of interest typically greater for larger deposit amounts, it is often greater for longer terms, as well. The rate of interest on a 30-day CD, for example, is generally less than the rate on a one-year CD. The longer an investor is willing to remain "hands off," the greater the overall yield can be. An exception is when there is an inverted yield curve. At this time, short-term term CDs may pay higher rates than long-term CDs because the market is less confident about long-term purchases.

Some investors do not reinvest the CD's interest when it is calculated. Instead, they receive regular interest checks from the bank or credit union, providing a steady stream of income. Not reinvesting the money into the CD account has the downside of reducing the overall yield that is possible through compounding. Investors who want to maximize returns should reinvest the interest each time it is calculated so the interest will earn interest, too.