In financial terms, a financial institution is any business that provides financial services for a fee.
There are nine types of financial institutions: commercial banks, savings & loan associations (also known as thrifts), credit unions, pension funds, insurance companies , brokerage firms, stock exchanges , bond markets and futures markets .
Lets go deeper into each financial institutions!
Since money creation by private financial institutions occurs through the act of lending , it follows that commercial banks are institutions that lend. Commercial banks accept deposits from members of the public and then use those resources to make personal loans to its customers. The rates charged for these loans are largely determined by decisions made at central banks around the world. Loans provided by commercial banks represent over 70% of money creation in many countries.
Savings & Loan Associations (also known as thrifts)
They are financial institutions that accept deposits from members of the public, but they lend most all of it out in the form of mortgages . The rates charged for these loans are largely determined by decisions made at central banks around the world. Loans provided by savings & loan associations represent over 20% of loans in many countries. Credit Unions
Credit unions are financial cooperatives , meaning that they are owned and controlled by their members, not outside shareholders. Since credit unions are not-for-profit financial institutions, they do charge fees to their customers; however, those fees generally reflect how important a particular service is to the financial institution rather than pure financial gain. Credit unions have historically been a financial institution of the working class. However, more and more families from higher income groups are choosing to bank at credit unions because they usually offer better financial products than most traditional banks.
Pensions funds are financial institutions that pool together the resources of individual investors for investment or reinvestment . Pension funds can be either public or private trusts – meaning that their financial resources are generally provided by the public or by a specific organization . In cases where pension funds are controlled by an outside board, they become known as collective investment schemes instead of financial institutions . Nonetheless, any financial institution that collects money from individuals and then invests it for them is considered a type of pension fund.
Insurance companies are financial institutions that sell insurance policies to a wide range of customers. Insurance products sold by financial institutions can either be linked to financial assets , such as financial derivatives , or non-financial assets . In the case of financial assets, financial institutions have been known to take out bets on what interest rates will be charged for certain products or what direction the market will move in next. By doing this, financial institutions hope to hedge their own risk exposures – meaning they want to protect themselves from any financial loss by placing wagers on the same market whose value they’re protecting .
Firms that specialize in brokering transactions between buyers and sellers are commonly known as brokerage firms . These types of financial institutions derive their financial resources from commissions – which are financial charges associated with financial transactions .
Stock Exchanges are financial institutions that serve as the middlemen between buyers and sellers of financial securities . The difference between a stock exchange and other types of financial institutions is that the exchanges only deal in financial securities. For example, many people don’t trade cars or houses on an exchange because they have to physically transfer ownership before the transaction can occur. An example of a financial security would be stocks , bonds or commodities . Bond markets are markets where traders buy and sell debt . Debt in this sense means money lent by one party (the lender) to another (the borrower). Debt can come in many forms such as personal loans , mortgages or corporate debt.