Financial Institutions Banking & Finance

Bellringer Before you begin this chapter, see what you already know about banking by taking the chapter pretest. Chapter 2, Financial Institutions

OBJECTIVES Describe the various types of depository institutions. Discuss types of deposit insurance

What is a Financial Institution? Businesses that offer financial services

Depository Institutions Banks Credit unions Savings associations Deposit: money placed in an account Depositors: customers who make deposits Banks—responsible for most of the money circulating in the country Examples: commercial banks, savings associations, and credit unions

Word Study: STOCKHOLDER Pictorial Representation Textbook Definition Real-World Connection Contextual Paragraph

Transfer Funds Transaction account: allows owner to use it to pay a third party Example: Checking accounts (most common) –Online bill payment –Debit card –Access to ATM –Used for day-to-day financial needs Accept Deposits Savings accounts: provide a safe place to store your money No check writing privileges Banks pay interest on savings accts. Example: Money market accounts –Pays more interest than average savings acct. –Require larger initial deposit and minimum balance ($500) Commercial Banks Owned by investors (stockholders)

Make Loans Make more loans than other depository institutions Consumers get banks to finance cars, houses, and higher education Other Services Rental of safe deposit boxes Selling of securities and insurance Trust departments manage money and other assets Commercial Banks Owned by investors (stockholders)

Savings and Loans Associations (S & L’s) aka savings associations Originally organized to help people save money Operate for profit Typically owned by stockers, OR Single person, group of people, or corporation

Credit Unions Owned by their members (Who are they? Hint: commercial) Cooperative (co-op): business/organization owned by its members Not for profit—money returned to the members Returned money takes the form of higher interest rates on savings; lower interest rates on loans Share accounts = savings accounts Share draft accounts = checking accounts Membership criteria must be met to join

Credit Unions Credit Union Membership TypeCharacteristics Employer-basedOpen to people working in a particular company Ex.: FedExFedEx Occupation-basedOpen to people who share a common occupation Ex.: Navy Credit UnionNavy Credit Union Geography-basedOpen to anyone living, working, or even volunteering or worshipping in specific geographic location. Ex.: Orion Federal Credit UnionOrion Federal Credit Union

FDIC—you know what it is, but here’s more! FDIC and NCUA (National Credit Union Administration) are virtually identical Eligible for FDIC Insurance Protection Not Eligible for FDIC Insurance Protection Checking accounts Savings accounts Money market accounts Certificates of deposit IRAs 401(k)s Mutual funds Stocks Bonds Annuities Life insurance Contents of safe deposit boxes

Go to your 1 o’clock buddy and discuss the following: 1.What do financial institutions do? 2.What are the three types of depository institutions? 3.Who owns commercial banks? 4.What was the original purpose of savings associations? 5.Why was the FDIC established? Justify, then agree or disagree as appropriate.

Closure 3 Things You Found Out 2 Interesting Things 1 Question You Still Have TURN THIS IN ON YOUR WAY OUT

Non-Depository Institutions

Bellringer: Place a dollar sign ($) in the column for which each characteristic applies. CharacteristicCommercial Banks Savings Associations Credit Unions For Profit Not-for-Profit Owned by Stockers or Privately Owned by Members Transfers Funds Accepts Deposits Makes Loans

Objectives Define non-depository institutions. Describe the role of investment banks in raising capital. Explain the purpose of securities. Describe the function of finance companies. Explain how insurance companies provide risk- management and investment options to their clients.

Non-depository Institutions Do not accept deposits Many make loans Accept money from customers to invest in business deals Spreads the risk and provides a way for customers to invest Institutions Investment banks Securities firms Finance companies Insurance companies

Investment Banks Provide services for businesses Help them raise capital (money) Common way to raise capital is to issue securities Securities: financial instruments that pay interest or give investor part ownership of the company One of main activities of investment banks

Investment Banks Help organizations issue bonds and find investors to buy them Highly regulated Bonds: debt issued by gov’t or company Buying a bond means loaning money to the organization (heard of a municipal bond?) Stock: gives the purchaser part ownership of the company (equity) Stockholders receive dividends (payments) from issuing company

Securities Firms (brokerage firms, stockbrokers, bondbrokers) Involved in trading of securities in financial markets Create and manage funds Execute transactions for customers Broker places order and charges a fee (commission) Full-service brokerage firms advise on which securities to buy Help customers manage their investments Discount brokers place orders, too Limited services, lower fees Many are online—example: E-Trade, Sharebuilder

Finance Companies (loan companies) Make profits by issuing loans to individuals and businesses Most are privately owned Consumer finance companies provide personal loans to individuals (with poor credit, higher interest rate) Example: payday lenders (EXPENSIVE—rates can be 300% or higher) provide short-term loans until next payday Business finance companies provide loans for businesses Example: Value City (WFNNB) Captive finance company provides loans so the manufacturer can easily sell its own goods Example: GM (General Motors)

Insurance Companies For-profit businesses that primarily sell insurance Insurance protects from loss 2 ways insurance companies generate revenue: –S–Selling insurance policies –S–Selling investment products Consumer buys policy by making periodic payments (premiums) Contract = policy Person or thing covered by policy = insured Also sell annuities, whole life insurance, and mutual funds Earn income from fees charged to create and manage these products

Activity: Station-to-Station Review There are 5 stations, each with 1 question When the music begins, write your response on the paper (not too big, others need space), and initial. Should you see any incorrect answers, use the red pen to correct. When the song changes, change stations and repeat

Station 1 What are four types of non-depository financial institutions?

Station 2 How do investment banks help companies raise capital?

Station 3 How do stockbrokers make their money?

Station 4 What is the primary business of insurance companies?

Station 5 What are the two ways insurance companies earn income?

Chapter 2 Vocabulary Matching Activity

Partner with your 2 o’clock buddy to create a HEADLINE article using 5 of your vocabulary words in context. Be creative in determining “what happened” in the story you are reporting on. Each team will present their “story” to the class. Use Publisher or Word and print. Checking account DepositDividendEquityMoney market account PremiumSavings account SecuritiesShare account Share draft account Activity: Word Splash