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 money management 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 distribute 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, community, investment, retail, etc.

2) Insurance

Insurance companies give protection against financial losses. Different types of insurance policies are available.

The common 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 the public and use the money to buy different types of securities.

Professionals manage mutual funds 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 with due diligence, valuation services, budget, savings, insurance, and tax strategies.

5) Stock Market

The stock market provides financial services for selling and buying multiple stocks under a defined set of regulations.

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It is a place for trading various 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 they charge on each transaction are the source of their income.

6) Debt Instruments

Debt instruments are utilized to obtain capital. Different kinds of debt instruments are credit cards, loans, bonds, etc.

Debt instrument focuses on debt capital raised by institutional entities like governments, and 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 examines and evaluates an organization’s financial statements to ensure 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 minimizing taxes under the law and regulation.

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 guide how to comply with them.

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They efficiently work for their clients and prepare and file tax returns. They work closely with their clients throughout the year to minimize tax liability.

9) Credit Rating

A credit rating service assesses a borrower’s creditworthiness by predicting their ability to pay back the debt.

It is important to get an idea about the creditworthiness of an individual or company to make better investment decisions.

The credit rating agencies determine the credit rating score. A high credit rating 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.

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