What is a commercial bank?
- A commercial bank is a financial institution that accepts cash deposits from the public. Their services also include releasing loans, checking accounts, and investing in businesses. An example would be Chase bank.
- Both individuals and small firms can use the services of a commercial bank. When most people do their banking at commercial banks, the titans of the business world keep their money in investment banks.
- Commercial banks earn cash though interest from loans. They also make money from fees like bank transfers and other banking services.
What happens to your money when you deposit it to a bank?
When an individual deposits money to a commercial bank, the money does not just sit there in a vault gathering dust. Banks use the deposit to make the economy grow by loaning it out to businesses and other individuals who need it. Think of it as lending your money to the bank in exchange for safekeeping. That’s why a commercial bank will set up a limit of how much should remain in the deposit account. Sometimes, they penalize clients when the amount deposited is below that limit. Needless to say, if everything is withdrawn, the bank account can be terminated.
Commercial banks have numerous clients. All the funds accumulated through savings deposits can be used by the bank for loan and mortgage revenue. The same money can also be used for other investments such as improvement of the bank’s services. Banks regularly statistically calculate how much they are losing from an investment. They will always make it sure that there is still money for client whenever they need to withdraw them.
In other words, banks are required to deposit a portion of the bank deposit as their cash reserve. In the US, 20% should remain in cash, while the remaining 80% can be used for lending and other banking services. That 80% can have a snowball effect on the bank as the money keeps rolling towards economic movement, like businesses buying essential machines or a family getting a loan to purchase their very own home. The money goes to different establishments and financial institutions. Such monetary phenomenon is also called “the multiplier effect.”
Why should you put your money in a commercial bank?
- Your money is in safe hands: Entrusting your money to a commercial bank offers you protection. Compared to the predictable sock drawer and adorable piggy banks, your money is more reliable in a commercial bank due to professional safety measures. Banks have an advanced security system that will alert authorities. Even if bank robbery occurs, a majority of them are apprehended. These villains are not as sophisticated as your favorite superhero movies show.
- Debit and credit cards make transactions easier: A modern commercial bank provides debit and credit cards for comfortable spending. You don’t need to bring paper bills or cash; just a bit of plastic instead. You can also conveniently purchase things online with credit cards.
- You can take advantage of banking services: Having a commercial bank account is frequently a prerequisite to taking advantage of loans and credit cards. In times of dire need, your relationship with a commercial bank could be your savior. Life can throw us a curveball, be it an unforeseen medical need not covered by insurance or other emergencies. The bank can lend you cash promptly with reasonable rates.
Commercial banks now
Most commercial banks now offer online banking services. These financial institutions offer convenient shopping to clients since they have access where they can regularly check their account. Banks now also have ATMs which save clients time to withdraw cash instead of lining up to a bank teller. Some banks now are exclusively online – without a physical building. These banks usually offer higher interest rates than their physical counterparts.
Due to their vast cash reserves and considerable assets, owning some bank stocks can give your portfolio a more diverse flavor. For newer investors, it is recommended that their portfolios are varied, with investments in different industries, to minimize the risk of losses. Always do your research before investing, and a diversified portfolio can be an excellent technique for lowering the chances of getting huge losses.