Diacylglycerols (DAGs) are important second messengers in biomembranes, and they can activate protein kinase C and many other enzymes and receptors. However, their interactions with cholesterol and other lipids have not been previously studied using molecular dynamics (MD) simulation. In this study, nine independent atomistic MD simulations were performed to specifically investigate the interactions between di16:0DAG, 16:0,18:1-phosphatidylcholine (POPC), and cholesterol. Despite their substantial differences in chemical structure, DAG and cholesterol produce some very similar effects in POPC bilayers: increasing acyl chain order and bilayer thickness, reducing volume-per-lipid, and decreasing lateral diffusion of molecules. More significantly, DAG also produces a strong "condensing effect" in PC bilayers. In comparison, cholesterol is more effective than DAG in producing the above effects. The driving force for the condensing effect is their molecular shape: DAG and cholesterol both have small polar headgroups and large hydrophobic bodies. In a lipid bilayer, in order to avoid the unfavorable exposure of their hydrophobic parts to water, neighboring phospholipid headgroups move toward cholesterol or DAG to provide cover. Thus, seemingly complex interactions between DAG, cholesterol, and phospholipid can be clearly explained using the Umbrella Model. Our simulations confirmed the hypothesis that DAG increases the spacing between phospholipid headgroups, which is important for activating protein kinase C and other enzymes. Interestingly, our simulations also show that the conventional wisdom that the spacing created by a DAG is directly above the DAG molecule is incorrect; instead, the largest spacing usually occurs between the first and the second nearest-neighbor PC headgroups from a DAG, due to the umbrella effect.