All too often investors forget the first rule of investing: if it sounds too good to be true, it probably is. Such is the case with stock market linked CDs.

The ads tout your principal is guaranteed by the FDIC and your returns are based on a stock market index like the S&P 500.

All true, but here's what you really need to know:

1. If you sell a market indexed CD before maturity, you might lose some of your principal.
2. If you must redeem this before maturity, many institutions allow you to do so only on specific liquidation dates.
3. Some market indexed CDs place a cap on how much you can earn. So if the S&P 500 were to rise 10%, you might see a less than 10% return.
4. Even though your returns are tied to stocks, you're taxed at ordinary income tax rates no matter how long you hold the CD.

So if you're looking for the safety of a CD, this investment isn't for you.

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