As with any business, finance companies need to make money in order to stay in business. And like many other businesses, finance companies rely on an array of income sources to keep the cash flowing in and out of their operations on a regular basis. Let’s take a look at how finance companies earn their money and what those sources are.
Common Loans (mortgages, credit cards, etc.)
There are many different types of loans that financial institutions give out. One common loan is a mortgage, for those looking to buy a house or have their current home improved. Another common loan is a credit card, which allows people to borrow money up to their credit limit and pay it back over time. Banks also offer overdraft protection programs, in case your bank account balance drops below $0 due to an unforeseen transaction. These are just a few ways that finance companies make money!
CDLs (Certificates of Deposit)
A CDL is a kind of bank account that pays a predetermined interest rate over a predetermined period of time. Some CDs are liquid and allow you to withdraw funds whenever you please, while others require you to wait for an agreed-upon date. The money in a CD usually comes from investments like government bonds, treasury bills, and certificates of deposit. By locking your money up for an agreed-upon amount of time, you receive a higher interest rate than if you left it with the bank for 12 months or deposited it in an account with a different institution. When your CD reaches maturity (the end of its time), your initial investment is returned to you along with any earnings accrued during that time period. You can also add money or new funds throughout your CD’s life as well!
To make money on their investments, companies buy insurance to protect against losses. Insurance companies like to invest in stocks because they provide a high return that doesn’t take much time. In 2007, Bear Stearns, an investment company that helped lots of different industries make loans and trades, collapsed and had to be bailed out by its investors.
ETFs (Exchange Traded Funds)
An ETF is a type of mutual fund that trades on an exchange, like stocks. It tracks the performance of an index or basket of stocks, such as the S&P 500. The index tracks changes depending on market conditions and which investments are performing well. With an ETF, you can make money whether stocks are going up or down by essentially buying shares on one end when they’re at a low price and then selling them for a higher price.
It’s important to note that your shares in an ETF aren’t actually worth a set value. They go up and down in price as supply and demand fluctuate. However, because you can buy or sell your ETF shares at any time through a broker, you can make money by buying low and selling high, which is why it’s sometimes known as a trading fund.
One of the most popular products for people looking to put their money into a bank is a savings account. A standard savings account generally has a $1,000 minimum deposit and will return no more than 3% in interest per year. The average interest rate on a savings account is much lower, hovering at around 0.5%. That’s still a good deal for someone who’s not expecting any withdrawals from the account for an extended period of time. These accounts are also insured by the FDIC (Federal Deposit Insurance Corporation) for up to $250,000 so you can rest easy that your money is safe while it collects interest.
There are two popular ways that a company can go about mining cryptocurrency. One of these methods is a work distribution scheme called proof-of-work, and one method is through a consensus algorithm called proof-of-stake. To put it simply, cryptocurrency mining occurs through an ever-increasing sequence of arbitrary calculations. These arbitrary calculations are organized into blocks and are added to a blockchain as they’re completed.
As more blocks are completed, more time is required for calculating future blocks. Bitcoin was the first cryptocurrency to use proof-of-work and has been mined on average every 10 minutes since its inception in 2009. Ethereum uses proof-of-stake and awards, miners, with tokens proportional to their contribution to securing transactions on their network.
Other cryptocurrencies use different algorithms to secure their network and award miners with tokens. This can include proof-of-work, which uses computing power to solve complex mathematical problems, or proof-of-stake, which requires owning a significant number of tokens to be able to verify transactions on a blockchain.