Loading the player...

What is a 'Demand Deposit'

A demand deposit consists of funds held in an account from which deposited funds can be withdrawn at any time from the depository institution, such as a checking or savings account, accessible by a teller, ATM or online banking. In contrast, a term deposit is a type of account that cannot be accessed for a predetermined period of time. M1 is a category of the money supply that includes demand deposits as well as physical money and negotiable order of withdrawal (NOW) accounts that have no maturity period but limited withdrawals or transfers.

BREAKING DOWN 'Demand Deposit'

Demand deposits provide the money consumers need for paying daily expenses. If depositors were required to notify their financial institutions before withdrawing funds, the depositors would have challenges making everyday purchases and paying bills.

Characteristics of Demand Deposit Accounts

Demand deposit accounts (DDAs) may have joint owners. Both owners must sign when opening the account, but only one owner must sign when closing the account. Either owner may deposit or withdraw funds and sign checks without permission from the other owner.

Financial institutions typically create minimum balances for demand deposit accounts. Accounts falling below the minimum value typically are assessed a fee each time the balance drops below the required value.

NOW Accounts, MMAs and Demand Deposits

Although negotiable order of withdrawal (NOW) accounts and money market accounts (MMAs) let holders deposit and withdraw funds on demand and typically pay market interest rates, they are not DDA accounts. MMAs typically limit withdrawals, or transactions including deposits, withdrawals and transfers, to six per month. Fees may apply if the limit is exceeded.

Cash Reserves and Demand Deposits

The amount of cash reserves a financial institution is keeping either in its vault or deposited with the Federal Reserve depends on the amount of demand deposits the institution is holding. The greater the amount of demand deposits, the more cash the institution reserves.

Regulation Q and Demand Deposits

Federal Reserve Regulation Q prohibits financial institutions from paying interest on demand deposits. However, the institution may give an account holder cash or credit payments or merchandise when opening an account. The account holder may not receive more than two payments annually, and the value of each payment may not exceed $10 for deposits under $5,000 and $20 for deposits exceeding $5,000.

Example of a Demand Deposit

In July 2016, Bank First reported net income for the second quarter of 2016 of $3.76 million, or $0.60 per share. The numbers represented an 11% increase in quarterly earnings over the same quarter the previous year. The increase was partly due to growth in demand deposit balances, which are a low-cost source of funding for the bank.

RELATED TERMS
  1. Bank Deposits

    Money placed into a banking institution for safekeeping. Bank ...
  2. Deposit Interest Rate

    The interest rate paid by financial institutions to deposit account ...
  3. Deposit

    1. A transaction involving a transfer of funds to another party ...
  4. Time Deposit

    A savings account or certificate of deposit (CD) held for a fixed-term, ...
  5. Term Deposit

    A deposit held at a financial institution that has a fixed term, ...
  6. Brokered Deposit

    A large-denomination bank deposit that is sold by a bank to a ...
Related Articles
  1. Investing

    What is a Demand Deposit?

    A demand deposit is any type of account where the money in the account may be withdrawn at any time without prior notice to the financial institution.
  2. Investing

    Explaining Term Deposits

    A term deposit (more often called a certificate of deposit or CD) is a deposit account that is made for a specific period of time.
  3. Personal Finance

    Find the Best Savings Account Rates

    You know how to spot the highest interest rate, but how do you really get the best deal on savings accounts?
  4. Investing

    What is a Bank?

    A bank is a financial institution licensed to receive deposits or issue new securities to the public.
  5. Personal Finance

    10 Bank Promotions That Pay You To Open An Account

    Find out which banks are running cash promotions this summer.
  6. Personal Finance

    Understanding Savings Accounts

    A deposit account held at a bank or other financial institution that provides principal security and a modest interest rate.
  7. Personal Finance

    Explaining the Reserve Ratio

    Reserve ratio is the amount of cash a bank must keep in its bank vaults or deposit into a central, governing bank.
  8. Personal Finance

    4 Savings Accounts for Investors

    Curious about the best saving accounts and which ones suit investors?
  9. Investing

    Best 2016 IRA Promotions (ETFC, BAC)

    Here are some of the best IRA promotions of 2016, with significant bonuses for large deposits.
RELATED FAQS
  1. For what types of accounts are demand deposits available?

    Learn about the different types of accounts designated as demand deposit accounts, such as savings accounts and money market ... Read Answer >>
  2. What is the difference between a demand deposit and a term deposit?

    Understand the meaning of demand deposits and term deposits, and learn about the major differences between these two types ... Read Answer >>
  3. What are the Federal Reserve's guidelines on demand deposit accounts?

    Read about some of the Federal Reserve's requirements and guidelines regarding the treatment, safeguarding and processing ... Read Answer >>
  4. How liquid are money market accounts?

    Understand the characteristics that distinguish money market accounts from checking, savings account and money market funds ... Read Answer >>
  5. How do you calculate payback period using Excel?

    Understand the various fees that can be assessed on a personal or business checking account, and learn methods to avoid being ... Read Answer >>
Hot Definitions
  1. Leveraged Buyout - LBO

    The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. ...
  2. Current Assets

    A balance sheet account that represents the value of all assets that can reasonably expected to be converted into cash within ...
  3. Tax Liability

    The total amount of tax that an entity is legally obligated to pay to an authority as the result of the occurrence of a taxable ...
  4. Preferred Stock

    A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
  5. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  6. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
Trading Center