Demand deposits are funds held in a bank account that can be withdrawn at any time, on demand, without any advance notice. Think of the money in your checking account (or 'current account' in Europe)—that’s the classic example. You can pull it out via an ATM, write a check, or use a debit card instantly. This makes these deposits incredibly liquid. They are the workhorses of our daily financial lives, offering convenience and immediate access to our money. This is the key difference between demand deposits and a time deposit (like a certificate of deposit, or CD), where you agree to leave your money with the bank for a fixed period in exchange for a higher interest rate. While most savings accounts are technically demand deposits, some may have withdrawal limitations. Because they offer such high liquidity, demand deposits typically pay very little to no interest.
For the savvy investor, understanding demand deposits goes far beyond just managing a checking account. They are a critical piece of the puzzle, both for analyzing companies (especially banks) and for managing your own portfolio.
For a bank, demand deposits are like gold. They represent the cheapest possible source of funding. Why? Because banks pay rock-bottom interest rates on these accounts. A bank takes these low-cost deposits and lends them out at much higher rates in the form of mortgages, car loans, and business loans. The difference between the interest a bank earns on loans and the interest it pays on deposits is a key driver of its profitability, known as the net interest margin (NIM). A bank with a large and stable base of demand deposits has a massive competitive advantage. It means customers trust the bank with their primary financial relationship, making these deposits “sticky” and less likely to flee for a slightly better rate elsewhere. This is a powerful economic moat that value investors, including Warren Buffett, actively seek. When you analyze a bank's balance sheet, look for a high percentage of its funding to come from demand and other low-cost deposits. It’s a sign of a healthy, high-quality business. A bank's ability to gather these funds cheaply is measured by its cost of funds. A lower cost of funds is almost always better.
From a personal finance perspective, the money you hold in a demand deposit account is your “dry powder.” In value investing, this refers to cash held in reserve, ready to be deployed when incredible investment opportunities appear. Market downturns, while scary, often present once-in-a-decade chances to buy wonderful companies at ridiculously low prices. “Be fearful when others are greedy, and greedy when others are fearful.” - Warren Buffett Holding cash in a demand deposit allows you to be that “greedy” investor. While it earns you next to nothing and gets eaten away by inflation, its value isn't in its return, but in its optionality. It gives you the option to act decisively when others are forced to sell. Without this liquidity, you're just a spectator. The key is finding a balance: holding enough cash to seize opportunities without letting too much of your capital sit idle for too long.
Demand deposits are a major component of a country's money supply. Economists and central banks like the Federal Reserve in the U.S. or the European Central Bank track them closely as part of the M1 money supply—a measure of the most liquid forms of money in circulation. A sudden, large increase in the total amount of demand deposits across an economy can signal a few things:
Watching these trends can provide a useful, high-level snapshot of the economic climate and consumer sentiment.