Financial Institutions
Unless you're storing cash in hand, it is very likely you're using a bank, brokerage or credit union - or a combination of the three to help you manage your finances.
Summary
For storing money, find a good online-only bank to get the best interest rates on savings account, CDs, and other financial products.
Before getting a loan from a bank, check local credit unions as well, as they may offer lower interest rates.
Investment in securities require you to have a brokerage account. Find a good broker that suits your needs.
Types of Institutions
Retail Bank
A retail bank is where you most often do your everyday banking, like withdrawing cash or depositing a check. Retail banks offer a range of products and services, such as savings accounts, checking accounts, personal loans, debit cards, credit cards or home mortgages, that are geared toward the individual consumer (it's also called consumer banking).
Commercial Bank
A retail bank is typically part of a larger commercial bank, which provides the services like (loans, credit cards, mortgages, checking and savings accounts, etc.) to both individuals and businesses.
Commercial banks generally make their money by taking the deposits they receive from their customers and using those assets to lend money with interest to other individuals or businesses.
Many commercial banks also have an investment banking arm that specializes in products and services for large investors and corporate customers, such as advising on mergers and acquisitions, and trading securities.
Credit Union
Credit unions provide a lot of the same products and services that retail banks do; the major difference is that they are not-for-profit, cooperative financial institutions whose purpose is to benefit their members.
Consumers might find that credit unions offer financial products or services with more favorable terms than those offered by large commercial banks. That’s because profits may be returned to members in the form of better account terms, lower interest rates, fewer fees or additional services.
Brokerage Firm
A brokerage firm, or simply a brokerage, facilitates transactions involving the trade of securities. At most brokerages, stockbrokers serve investors who trade public stocks or bonds, or want to invest in different types of funds.
A full-service brokerage provides a variety of services other than just trading. These might include market analysis and research, tax advice or retirement and estate planning. Since full-service brokerages provide a large number of services, they often charge investors higher fees or commissions than discount brokerages, which only execute trades without offering additional financial services.
Pros and Cons
Bank vs Credit Unions
Credit Unions are not safer than Banks. Accounts in banks and credit unions are both insured for amounts up to $250,000 via either the FDIC for banks or the NCUA for credit unions. If you have more than $250,000 to deposit at either a bank or credit union, you should speak to account managers.
Most credit unions cannot compete with banks when it comes to convenience (access to ATMs and branches) and technology like mobile banking. Many credit unions also have little to offer when it comes to online banking. Credit unions may offer lower interest rates on loans, but the array of financial products may be limited in scope compared with big banks.
You might have to live or work in a certain region to become a member of a credit union. Or the field of membership, which is the common bond shared by the credit union members, might have other requirements.
Brokerage vs Bank
Brokerage accounts have features that are similar to a bank account—you can deposit and withdraw money when you wish, use checks, debit cards, and make automatic payments. However, there are a couple major differences between them.
Brokerage account gives you the ability to buy and sell securities (e.g., mutual funds, ETFs, stocks, bonds, etc.) to help grow your money, while a bank account typically helps you manage your cash through a savings or checking account. Brokerage accounts are also not FDIC Insured, while bank balances are (up to $250K per depositor). The insurance you get for a brokerage account only protects you against brokerage failure (SIPC).
Taxation
Taxable account
An account that you fund with post-tax dollars. If you earned money on your investment at the time that you sold it, you may have to pay capital gains tax on those earnings. If you lost money, then you may be able to get a tax deduction by reporting a capital loss.
Tax-advantaged account
A tax-advantaged account helps reduce your tax burden either by:
- Deferring the taxes on your contributions and investment growth until you make withdrawals in the future.
- Or by allowing for tax-free growth on your post-tax contributions, so you likely won’t end up owing taxes when you make withdrawals down the line.
Tax-advantaged accounts are commonly used to save for retirement, health or education and can include Roth and Traditional IRAs, 401(k)s, HSA, 529 accounts.
References
- Difference Between Banks, Credit Unions and Brokerages
- Credit Unions vs. Banks: Which One Is the Best for You? | Investopedia