Introduction to Finance

Investment banking fi rms
, also referred to as investment banks, sell or market new 
securities issued by businesses to individual and institutional investors. 
Brokerage fi rms
assist individuals who want to purchase new or existing securities issues or who want to 
sell previously purchased securities. Investment banking and brokerage activities are often 
combined in the same fi rms. However, in contrast with mutual funds, investment banking 
fi rms and brokerage fi rms do not gather the savings of individuals but rather market or sell 
securities issued by corporations directly to individuals, as depicted in Figure 3.2. Investment 
banking and brokerage fi rms obtain fi nancial capital to carry out their activities from their 
own resources or from other fi nancial institutions.
insurance companies 
provide 
fi nancial protection to individuals 
and businesses for life, property, 
liability, and health uncertainties
pension funds 
receive 
contributions from employees 
and/or their employers and invest 
the proceeds on behalf of the 
employees for use during their 
retirement years
investment companies 
sell 
shares in their fi rms to individuals 
and others and invest the pooled 
proceeds in corporate and 
government securities
mutual funds 
open-end investment 
companies that can issue an 
unlimited number of their shares to 
their investors and use the pooled 
proceeds to purchase corporate and 
government securities
investment banking fi rms 
sell 
or market new securities issued 
by businesses to individual and 
institutional investors
brokerage fi rms 
assist 
individuals to purchase new or 
existing securities issues or to sell 
previously purchased securities

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3.3 Overview of the Banking System
51
Finance Firms
Finance fi rms, while an important type of fi nancial institution, are not included in Figure 3.2 
because they focus largely on providing loans to individuals for meeting credit needs and pur-
chasing durable goods and homes.