Financial institutions and markets | Investments and retirement | Financial Literacy | Khan Academy

So let's talk a little bit about financial institutions. There are many different types of financial institutions, but probably the most basic one that almost everyone encounters at some point in their life is a bank. At a bank, at the most basic level, there are many things that a bank can do, but it's a place where you can deposit your money, arguably for safe keeping, and a place where you can access it easily. Maybe you're going to be able to get a little bit of interest on it.

Think about what the world would be like if you did not have banks. You would probably put your money, stuff it into your mattress, or put it in a vault somewhere. It could be a little bit scary if someone were to break into your house, and I think more people would break into houses if they knew that people were stuffing money into their mattress. But even more than that, if you were to then go make a big purchase of some kind, instead of handing someone your debit card or being able to do it in an electronic way, you would have to take all the cash there, which by itself could be a security issue. Frankly, it would be hard to keep track of all of that.

With modern banks, you're able to make your deposits, the money is accessible with a debit card, you can log online, and use the various apps to see what your different transactions have been, how much, and what your balances are, wherever you are. Many times in the world, I was just out of the country, and with my debit card, I was able to go and get cash. I was able to buy things; I didn't have to take all of that cash with me on a plane.

Now, the other thing that banks do is they'll give you interest. The way that they are able to create that interest is they take a large fraction of the money that's deposited and then they will lend it out to other folks. If you have less than $250,000 per person, per account type, in a U.S. bank, that's insured, so you can feel pretty confident that if you put that money in there, when you need that money, you'll be able to take it out. You don’t have to worry too much about that dimension of it. By putting it in the bank versus having it stuffed in your mattress, you're going to be able to get some interest on it and access things very easily.

Now, there are other financial institutions. There are things like insurance companies. We talk a lot about insurance in this course, and in order to get insurance, you need someone to take the other side of it. You need someone to pay a certain premium, a certain amount per month or per year, to agree that, hey, we got your back if the bad thing were to happen. Not just anyone could start an insurance company or a bank, for that matter. They're heavily regulated because the government— we all want to make sure that these other groups, these other institutions, are going to be there for you when you need it.

When you go to a bank and say, "I want my money back," they better give you your money back. If you go to an insurance company and say, "Hey, look, my car got totaled. I need the money back,” you better hope that that insurance company is there and that they're going to be good for your money.

Now, there are many other types of financial institutions, and some of them are connected or parts of insurance companies or banks. You could have things like brokerages. These are folks who help broker transactions. Oftentimes, it's a stock brokerage; they're helping. If someone is buying a stock, that means that someone else is selling that stock. It could be the actual company that's selling the stock, but usually, you're just buying it from somebody else out there in the stock market. So, you need the brokers who help facilitate that transaction. You have the stock markets themselves that obviously help, or in an even more direct way, I should say help make those transactions happen as well.

I could go on and on and on; we could spend hours talking about all the different types of financial institutions. But it's important to realize that when you're using your money or when you're interfacing with any of these, you should ask: “Okay, what does this organization do? What am I really getting out of it? What are they providing for me? And then, what are the risks involved? What are they getting out of it? How do they make their money? And is that something that I think is a reasonable thing for them to do given the services that they're providing to me?”