Advantages And Disadvantages of Demand Deposit

A demand deposit (or non-confidential money) is a bank account that allows the depositor to withdraw funds without warning to the bank on request. In order to pay for regular expenditures, the depositor may usually use demand deposit funds. The bank or financial institution will pay either a low or zero interest rate on the deposit for the funds in the account. This record adjusts are typically viewed as cash and structure most of the barely characterized cash gracefully of a nation. Basically, these are stores in the bank that can be removed on interest, with no earlier notification. Amounts in a checking account or savings account should be typical examples of demand deposits. Notice that there are distinct demand deposits from term deposits. Term deposits require depositors to wait before making a withdrawal for a predetermined duration.

(Example of Demand Deposit)

Demand deposits are commonly considered to be part of a broadly specified money supply since they can be used as a means of payment for goods and services and to settle debts by checks and drafts. For daily purchases, these accounts provide an amount. The sum can be accessed from the banks at any time. On the off chance that, if investors need to illuminate Depository establishments prior to pulling out assets the contributors would have been confronting challenges while covering tabs or buying day-by-day necessities. A country’s money supply is commonly defined as consisting of currency plus deposits of demand. Demand deposits account for a majority of the supply of money in most countries.

People are starting to withdraw cash from banks and other financial institutions during the financial crisis, leading to a decrease in demand deposits and a shortening of the money supply. Economists have hypothesized that the magnitude of the Great Depression contributed to this effect.

Advantages and disadvantages of demand deposit:

Some of the advantages are given below:

  • Demand Deposits allow the depositor without any advance notice to the bank to withdraw funds on demand.
  • Demand Deposit allows joint owners of a single account.
  • Demand Deposits allow the customer to easily access their money. Bank Teller, Net Banking, ATMs, by writing checks, are some types.
  • As required for personal use or domestic needs and sufficient numbers of transactions are permitted, the user can withdraw funds at any time.
  • In Demand Deposits, an electronic transfer is allowed. When we have our Demand Deposit account, we do not need to carry cash.
  • Banks do not charge any extra fees for withdrawing the amount.
  • These are also considered in Money Supply by Federal Reserve.

Some of the disadvantages are given below:

  • Demand Deposits pay very low interest or no interest at all occasionally. But in order to provide services for these accounts, banks typically charge monthly fees.
  • If we compare Return on Investment in Bank accounts with Treasury bills, business papers, relative to these investments, the return is very low. Similarly, a higher interest rate than demand deposits is provided by many investments with less risk. In contrast to market inflation rates, capital appreciation in demand deposits is very small.

Demand deposits are an important phase of the cash supply of a country, defined inside M1 money. M1 cash consists of currency plus demand deposits. Demand deposits make up a large phase of the money provide in many countries. Often as compared to other investment sources available in the industry, the fee paid by financial institutions to hold this deposit is much smaller. Therefore if an individual’s main goal is to quickly access the fund and not the interest received on the sum, then the best option is the Demand Deposit.

 

Information Sources:

  1. corporatefinanceinstitute.com
  2. educba.com
  3. wikipedia