9 Types of Financial Services: What Are They? And How Do They Work?

Financial services mean the services offered by financial and banking institutions. It also means the management of money by organizations like banks, investment banks, insurance companies, and stock exchanges.

Financial services help individuals and organizations in the management of their finance related problems. Financial services are intangible and customer-oriented.

Financial services act as a link between the investor and borrower and help in the distribution of risks. Different types of financial services are described below:

1) Banking

Banking works as a safe service for depositing excess cash. Banking service is highly regulated by the government and play an important role in the economy.

Under this service individuals and organizations deposit, their money and borrowers can get loans. There are various types of banks like commercial banks, community banks, investment banks, retail banks, etc.

2) Insurance

Insurance companies give protection against financial losses. Different types of insurance policies are available. The common types of insurance policies are life insurance, health insurance, car insurance, etc.

Companies require different insurance policies that will protect them from financial losses due to unexpected occurrences.

3) Mutual Funds

Mutual fund institutions pool money from public and use the money to buy different types of securities.

Mutual funds are managed by professionals and they charge annual fees for their service. Mutual funds’ investments are also diversified which helps in reducing risks.

4) Advisory

Advisory services help individuals and firms with different types of activities.

Financial advisors help their clients to achieve financial goals. They help their clients in areas like due diligence, valuation services, budget, savings, insurance, and tax strategies.

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5) Stock Market

The stock market provides financial services of selling and buying of multiple types of stocks under a defined set of regulations. It is a place for trading various kinds of securities in a secure and controlled environment.

The functions of a stock market are dealing in securities transactions, efficient price discovery, security, and validity of transactions, liquidity maintenance, investor protection, etc.

The stock exchanges charge a fee for their services and the fees that they charge on each transaction are the source of their income.

6) Debt Instruments

Debt instruments are utilized for the purpose of obtaining capital. Different kinds of debt instruments are credit cards, loans, bonds, etc. Debt instrument focuses on debt capital raised by institutional entities like governments, private and public companies.

Some of the common types of debt instruments are bonds, debentures, mortgages, and treasury bills. Debt instruments can be short-term or long-term and provide fixed and higher returns.

7) Audit

Another financial service is a financial audit which is the examination and evaluation of financial statements of an organization to make sure that the records are true and fair. The most common three types of audits are internal audit, external audit, and internal revenue service audit.

Generally, companies receive a yearly audit of their financial statement. The audit helps in the detection and prevention of fraud. An audited financial statement ensures compliance with legal requirements and creates confidence among stakeholders.

8) Tax Consultancy

Tax consultancy is a financial service where a financial professional provides advice on the ways of minimizing taxes under the law and regulation.

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The advice and services given by tax advisors will vary depending on the taxpayer’s situation. Tax consultants understand the laws and regulations relating to an individual or organization and they provide guidance on how to comply with those laws and regulations.

They work for their clients in an efficient way and prepare and file tax returns for them. They work closely with their clients throughout the year to ensure tax liability is minimized.

9) Credit Rating

Credit rating service is assessing the creditworthiness of a borrower by predicting their ability to pay back the debt. It is important to get an idea about the creditworthiness of an individual or company in order to make better investment decisions.

The credit rating score is determined by the credit rating agencies. A high credit rating score indicates a high chance of paying back the loan. A good credit rating indicates an entity’s chances of being approved for a given loan.

A poor credit rating indicates that the company may fail to make its bond payments. Credit rating changes might have a significant influence on the market.

The presence of financial services enables a company to improve its economic condition. The financial service enables an individual to obtain various customers through higher purchases.

A number of financial services providing institutions promote investment, savings, production, etc. Financial services providing institutions help in making good financial decisions.

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