Question

What is the importance of banks and financial institutions in a consumer's life and for business entities? also comment on the importance of financial instruments such as currency, credit cards, checks, or a bank draft.

Answer 1

A financial institution (FI) is a company engaged in the business of dealing with financial and monetary transactions such as deposits, loans, investments, and currency exchange. Financial institutions encompass a broad range of business operations within the financial services sector including banks, trust companies, insurance companies, brokerage firms, and investment dealers. Virtually everyone living in a developed economy has an ongoing or at least periodic need for the services of financial institutions.

Various importance of these institutions are: 1)They provide economic loans to various persons or organisations. 2) They provide financial interest to the money deposit accounts. 3) They can control and manipulate the money flow in an economic market.

Main purpose of banks
Keep money safe for customers
Offer customers interest on deposits, helping to protect against money losing value against inflation.
Lending money to firms, customers and homebuyers.
Offering financial advice and related financial services, such as insurance.

Financial Instruments are intangible assets, which are expected to provide future benefits in the form of a claim to future cash. It is a tradable asset representing a legal agreement or a contractual right to evidence monetary value / ownership interest of an entity.

Some of the most common examples of financial instruments include the following:

Exchanges of money for future interest payments and repayment of principal.
Loans and Bonds. A lender gives money to a borrower in exchange for regular payments of interest and principal.
Asset-Backed Securities. Lenders pool their loans together and sell them to investors. The lenders receive an immediate lump-sum payment and the investors receive the payments of interest and principal from the underlying loan pool.
Exchanges of money for possible capital gains or interest.
Stocks. A company sells ownership interests in the form of stock to buyers of the stock.
Funds. Includes mutual funds, exchange-traded funds, real estate investment trusts, hedge funds, and many other funds. The fund buys other securities earning interest and capital gains which increases the share price of the fund. Investors of the fund may also receive interest payments.
Exchanges of money for possible capital gains or to offset risk.
Options and Futures. Options and futures are bought and sold either for capital gains or to limit risk. For instance, the holder of XYZ stock may buy a put, which gives the holder of the put the right to sell XYZ stock for a specific price, called the strike price. Hence, the put increases in value as the underlying stock declines. The seller of the put receives money, called the premium, for the promise to buy XYZ stock at the strike price before the expiration date if the put buyer exercises her rights. The put seller, of course, hopes that the stock stays above the strike price so that the put expires worthless. In this case, the put seller gets to keep the premium as a capital gain.
Currency. Currency trading, likewise, is done for capital gains or to offset risk. It can also be used to earn interest, as is done in the carry trade. For instance, if a trader believed that the Euro will decline with respect to the United States dollar, then he could buy dollars with Euros, which is the same thing as selling Euros for dollars. If the Euro does decline with the respect to the dollar, then the trader can close the position by buying more Euros with the dollars received in the opening trade.