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What is a 'Deposit'

A deposit can be one of two things:

1. A transaction involving a transfer of funds to another party for safekeeping.

2. A portion of funds that is used as security or collateral for the delivery of a good.

BREAKING DOWN 'Deposit'

1. A transaction involving a transfer of funds to another party for safekeeping.

This type of deposit is identical to the money an investor transfers into a bank's savings or checking accounts. It can be made by individuals or entities such as corporations. The money is still owned by the person or entity that deposited the money, and it can be withdrawn at any time, transferred to another person's account, or used to purchase goods. Often, a person must deposit a certain amount of money in order to open a new bank account, which is known as a minimum deposit. This amount covers the costs associated with opening and maintaining the account.

Depositing money into a typical checking account qualifies as a transaction deposit, which means that the funds are immediately available and liquid, without any delays.

The exception to this rule is a time deposit, also known as a term deposit or a certificate of deposit (CD), which is a savings account that restricts withdrawals within a certain time period. This time period varies from 30 days to around five years. In most cases, the depositor must give notice prior to withdrawing funds before the time limit expires, and there are fees for doing so.

Interest on Deposits

When money is deposited into a banking account, it earns interest. This means that, at fixed intervals, a small percentage of the account's total is added to the amount of money already in the account. Interest can be compounded at different rates and frequencies depending on the bank or institution, so it's a good idea to look around for the best interest rates before committing to a savings account. Time deposits, CDs, and other accounts that restrict withdrawals offer a higher interest rate, which allows you to save more money, more quickly.

2. A portion of funds that is used as security or collateral for the delivery of a good.

Some contracts require a percentage of funds to be transferred before delivery as an act of good faith. An example is the initial margin deposit required for entering into a new futures contract.

Deposits are also required on many large purchases for which payment plans are required, such as real estate or vehicles. These deposits, set at a certain percentage of the full purchase price, are more commonly known as down payments, and they prove that you fully intend to follow through with the purchase. In the case of rentals, this is known as a security deposit, and it covers the costs of any potential damages done to the property during the rental period, and it is often refundable if the property is returned in good condition.

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