What is a Deposit?
Deposit is a term used to denote the money kept or held in any bank account, especially to accumulate interest. The fund used as a security to get the goods delivered can also be called a deposit. Any transaction processed to transfer money to an entity for safeguarding can be referred to as a deposit.
- Deposit is a term used to denote the money kept or held in any bank account, especially to accumulate interest.
- Deposit also refers to a sum of money used as a security for the delivery of products or making use of services.
- Demand and time are the two types of deposits made by businesses or individuals.
Deposit is a term that can also be used in situations other than financial transactions. The following are the two meanings of the term:
First, deposit refers to the process involving the transfer of a sum of money to another entity to be kept in its custody is a deposit. Hence, the money transferred by investors to checking accounts or saving accounts at credit unions or banks are deposits. Here, the money transferred still belongs to the one who originally deposited the money, and that entity is eligible to transfer the fund to another entity’s account, withdraw any portion of funds any time, and/or use the fund for purchasing products and services.
Generally, a person needs to deposit a certain amount to open a bank account. The amount is called the minimum deposit. The deposits made into the checking accounts are transaction deposits, implying the funds are liquid and available immediately.
Another usage of deposit occurs when a sum of money is used as a security for the delivery of products or making use of services. Entities such as brokerage firms require traders to make some deposits before they can enter into futures contracts. The initial deposit before delivery is required by certain contracts as a deed of fair dealing.
Types of Deposits
The following are the two common types of deposits:
1. Time Deposit
A bank deposit with a fixed interest rate and term is called a time deposit. A person cannot withdraw money from a time deposit account for a fixed term or must pay a penalty should he/she need to withdraw funds before the term ends. The penalty amount depends on the issuer and the term of the time deposit.
For example, a person buys a certificate of deposit (CD) worth $4,000 at a fixed rate of interest of 5% for a fixed term of two years. At the end of the first year, the deposited fund will become $4,200, and at the end of the term, the deposit amount that can be withdrawn would be $4,410.
A time deposit account is an interest-bearing account that allows the depositor to accumulate money at higher rates of interest than the standard savings account. When the term period ends, account holders can either withdraw the funds or renew the deposit to be held for another term.
The funds in time deposit accounts are used by financial institutions to provide financial products – such as loans – to eligible businesses or individuals. For making profits, banks lend the funds kept in time deposit accounts at interest rates higher than the ones provided to the depositors.
2. Demand Deposit
The money deposited with a financial institution that can be drawn from the account without providing any prior notice is called a demand deposit. Generally, demand deposits pay very little interest or no interest at all since the lock-in periods are shorter than time deposits.
Below are three types of demand deposit accounts:
- Checking Account: A checking account enables easy cash accessibility by allowing withdrawals from debit cards, ATMs, and writing checks. Thus, the checking account helps to improve the liquidity of small businesses over the short term.
- Money Market Account: The interest rates of a money market account depend on the market, and hence, the interest rates vary daily. Thus, this account sometimes offers higher and sometimes lower than savings accounts.
- Term Deposit/Savings Account: They are a type of deposit accounts intended for longer periods. They also provide higher interest rates and lesser liquidity than checking accounts. Direct withdrawal through checks is not allowed. Banks may charge fees for early withdrawal of funds.
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