9 Kinds of Financial Companies

Get familiar with financial companies, and you might find some that serve you better.

Feb 16, 2014 at 11:00AM

You may be familiar with terms such as "investment banker" and "credit union," but do you really know your financial companies and understand what each of them does? It's good to have a solid understanding of financial companies, as most of us interact with them regularly. Here's a quick review of nine key kinds of financial companies.

Commercial banks
These are just called "banks" by most of us, as they take in our deposits, lend us money, and offer us safety deposit boxes, ATMs, and more. Many are offering financial advice, too. They also pay us interest. Interest rates these days tend to deliver a mere pittance, but they've been in the double digits in the past and are likely to rise in the future.

Savings and loans
Savings and loan associations, or "thrifts," are financial companies that are not technically banks, though they certainly look and act like them. Their loans are mostly mortgages, but like commercial banks, they offer a variety of other loans, take deposits, and pay interest -- at rates that often beat those of commercial banks.

Credit unions
Credit unions are also bank-like nonbanks, owned by their members. These financial companies are usually nonprofit and tend to offer very competitive interest rates. It used to be a little tricky to be able to join one, as you had to be a member of a certain organization or work for a certain company. It's easier these days, with many local credit unions only requiring local residency.

Investment banks
These financial companies help businesses and governments raise money by issuing stock or bonds (by "underwriting" the securities), facilitating mergers and acquisitions, and providing research and advice, among other things. Investment banks used to be part of the banks average Americans used, but the 1933 Glass-Steagall Act separated investment banking from commercial banking. Goldman Sachs and Morgan Stanley are investment banks. When you hear that a company is debuting on the stock market via an initial public offering (IPO), an investment bank is most likely making that happen -- and taking a hefty fee for services (often 7% of the IPO value).

Brokerages are also members of the financial companies club, offering accounts where people can invest in stocks and bonds and other securities (such as exchange-traded funds and mutual funds), invest with borrowed money ("on margin") if they want, and also often conduct some banking business, such as writing checks. A good brokerage will charge you relatively little per trade while also offering valuable services such as access to company data and research, as well as portfolio evaluation tools. Old-fashioned "full-service" brokerages tend to offer more hand-holding and charge steeper rates, while discount brokers charge far less and still offer a lot. You can maintain retirement accounts such as IRAs at brokerages, and many offer other products as well, such as annuities.

Insurance companies
Insurers are, obviously, also financial companies. They offer protection for a price -- a policy's premium -- to defend you against losses such as auto accidents, home fires, theft, death, health setbacks, and so on. Some of their policies offer just protection, while others have "investment" elements built in, which aren't always the best way to grow your wealth. Many insurers also offer annuities, such as variable annuities or immediate annuities, which can provide income streams later in life. There are downsides to variable annuities worth considering, and index annuities are problematic, but immediate annuities can be great for many people, especially in higher interest rate environments. 

And more
There are even more kinds of financial companies, such as venture capital firms, which are known for providing early funding to young companies and helping them grow. (It's a speculative business, but it can pay off well.) Mutual fund companies offer familiar investment vehicles, pooling investors' money and spreading it out among a range of stocks and/or bonds and other securities. Hedge fund companies are somewhat similar but focus more on wealthier clients and often charge much steeper fees.

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Selena Maranjian, whom you can follow on Twitterhas no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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