======Demand Deposit====== A Demand Deposit (also known as a 'sight deposit' or 'current account' in some regions) is money held in a bank account that you, the depositor, can withdraw at any time—or "on demand"—without giving the bank any prior notice. Think of your everyday checking or savings account; that's a demand deposit. This immediate access, or [[liquidity]], is their defining feature. They are the polar opposite of a [[Term Deposit]] (like a [[Certificate of Deposit]] or CD), where you agree to lock your money away for a fixed period in exchange for a higher [[interest]] rate. Because they are so readily available for spending, demand deposits form a crucial part of a country's basic money supply, known as the [[M1 money supply]]. While they offer supreme flexibility and safety (up to a certain limit), they typically pay very little to no interest, making them a poor choice for long-term wealth growth but an essential tool for managing daily finances and strategic cash reserves. ===== How Demand Deposits Work ===== The mechanics of a demand deposit are beautifully simple and familiar to almost everyone. It's a foundational relationship between you and your bank. - **Step 1: You deposit funds.** You hand over cash or transfer money electronically into an account, such as a checking account. - **Step 2: The bank records a liability.** The bank now owes you that money and records it as a liability on its [[balance sheet]]. - **Step 3: You access funds "on demand."** You can withdraw your money instantly and without penalty using various methods: * Writing a check * Swiping a debit card * Withdrawing cash from an ATM * Making an electronic transfer online The bank is legally obligated to give you your money whenever you ask for it. This instant availability is what makes demand deposits the lifeblood of day-to-day commerce. ===== Demand Deposits in the Banking System ===== Beyond your personal finances, demand deposits are the bedrock of the entire modern banking system. They are the raw material that banks use to generate profits and, in the process, create money. ==== The Engine of Banking ==== When you deposit your cash, the bank doesn't just let it sit in a vault. This is where the magic of [[fractional-reserve banking]] comes in. The bank is required to keep a small fraction of your deposit in reserve, but it can lend out the rest. For example, if you deposit $1,000, the bank might keep $100 and lend out $900 to a borrower. That $900 loan then gets deposited in another bank account, and the process repeats. In this way, your initial deposit is multiplied throughout the economy, expanding the money supply and fueling economic activity through loans for mortgages, small businesses, and more. Your humble checking account is, in effect, a small cog in a giant economic engine. ==== The Investor's Safety Net ==== This system has an inherent vulnerability: what if a large number of depositors lose confidence in the bank and try to withdraw their funds all at once? This is called a [[bank run]], and it can cause a solvent but illiquid bank to fail. To prevent this panic, governments have created a powerful safety net: [[deposit insurance]]. In the United States, the [[FDIC]] (Federal Deposit Insurance Corporation) insures deposits up to $250,000 per depositor, per insured bank, per ownership category. The European Union has a similar framework, with national deposit guarantee schemes (DGS) protecting deposits up to €100,000. This insurance means that for most people, the money in their demand deposit accounts is exceptionally safe, backed by the full faith and credit of the government. ===== A Value Investor's Perspective on Demand Deposits ===== For a value investor, cash held in a demand deposit isn't a lazy asset; it's a strategic position. The decision to hold cash is an active one, balancing its drawbacks against its immense strategic value. ==== Cash: The Ultimate Option ==== The legendary investor [[Warren Buffett]] has often said that "cash is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent." For an investor, cash held in a demand deposit is a form of [[optionality]]. It's "dry powder" waiting to be deployed. While others are fully invested and panicking during a [[market downturn]], the investor with a healthy cash position can act rationally and opportunistically. When Mr. Market offers high-quality businesses at bargain prices, cash allows you to pounce. Holding cash is a bet that you will eventually find an investment that offers a much better return than the near-zero yield of a bank account. It’s the price you pay for the ability to act when others are forced into inaction or, worse, forced to sell. ==== The Silent Thief: Inflation ==== The biggest enemy of cash is [[inflation]]. While your $100,000 in the bank is nominally safe, its purchasing power is constantly eroding. If inflation is running at 3%, your cash loses 3% of its real value every year. Holding too much cash for too long is a guaranteed way to see your wealth decline in //real// terms. Therefore, a value investor views cash as a temporary holding place, not a permanent home. The goal is to minimize the time cash sits idle before it's converted into productive, return-generating assets. The decision to hold cash is a constant trade-off between the safety and optionality it provides and the corrosive effect of inflation on its [[real return]].