What Is the Meaning and Purpose of a Financial Institution?

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Financial institutions serve as intermediaries for individuals, companies and financial markets. They allow people to deposit money, transfer funds and borrow loans in a secure environment.

Basics of Financial Institutions
Financial institutions deal with financial transactions such as investments, currency exchange, loans and deposits. The government heavily regulates them since they comprise an essential part of the economy. Market stability and consumer protection are built into the foundation of financial institutions.

The Federal Deposit Insurance Corporation (FDIC) insures financial institutions so that the stock market does not become vulnerable. The FDIC was formed in 1933 because of bank failures that happened in the 1920s and 1930s. A country's banking system is a great predictor of its economic stability. When banking systems are not stable, the stock market goes into panic mode. In a global economy, financial institutions need to employ strategic thinking in order to manage and assess banking risks.

Different Types of Financial Institutions
Financial institutions offer several different types of products depending on its type. Here are the different types of financial institutions:

  • Banks and Credit Unions: Credit unions and banks are the most common types of financial institutions. Banks are private financial institutions that are owned by stockholders. Credit unions are non-profit entities. Their members own them. They offer financial products such as savings and checking accounts and certificates of deposit (CDs). Some credit unions offer lower priced financial products than traditional banks. These types of financial institutions offer mortgages for prospective homeowners. Banks and credit unions offer the following types of products: wire transfers, lines of credit, credit cards, currency exchange. Banks and credit unions serve as intermediaries between consumers and companies when facilitating financial transactions.
  • Investment Bank: These types of financial institutions offer services such as investments, equity offerings and capital expenditures. They offer brokerage products for private investors. Investment banks assist with trading on the stock market and offer advanced financial solutions such as mergers and acquisitions and corporate restructuring. Investment banks help individuals with wealth management. Their financial advisory services assist companies and individuals with managing funds. Among the financial products that investment banks provide are stocks, bonds, private equity investments and hedge funds.
  • Insurance Companies: This is the oldest type of financial institution. Insurance is a financial product that assesses risk then protects against it. It is a preventative financial product since money is spent on premiums before the actual product is needed or used. In some cases, this financial product is never used. Insurance fuels economic growth and facilitates business and individual investments. This type of financial institution protects assets against financial instability.
    • There are many different types of financial institutions that assist individuals and companies in facilitating monetary transactions. Banks and credit unions are standard financial institutions that provide deposit services as well as loans when needed. Investment banks provide wealth growth and management. Online financial institutions exist without a storefront. They offer many of the same services as their brick and mortar counterparts. Many of these online financial institutions offer lower cost products due to their lower overhead costs.