The financial sector is one of the most critical sectors of the economy, influencing the stock market. The financial sector is the stock market segment, which includes companies and firms that offer financial services to other companies and individual customers.
A steady financial sector indicates a healthy economy with sound growth. However, the changes and downfall in the financial sector are quickly reflected in other segments of the stock market.
Investors planning to invest for the long or short term in the financial market should understand its various facets to make informed decisions about their investments. Whether you are a seasoned stock trader or just looking to invest your savings in a safe place, it is essential to understand how the financial sector works and what factors can influence its trends.
Read on till the end of the article to understand everything you need to know about the financial sector to make sound predictions and evaluations about profitable financial stock prices.
1. What are Financial Stocks?
2. Types of companies in the financial sector
3. How to evaluate Financial stock prices
4. Are Financial Stocks for you?
A majority of people out there with limited knowledge of the financial sector think, Financial Stocks mainly constitute banks. Though banks make for a major portion of this sector, there are various other firms and institutions that comprise the financial sector of the economy.
The financial sector comprises institutions and firms that offer financial services to individual customers and big companies. These services include loans, money management services, insurance, and payment services— the financial sector indeed goes way beyond just banks with many other firms offering finance-related services.
As the financial sector includes various services offered to companies and individuals, there are different stocks in the financial stock market sector.
- Banks: Banks are the biggest contributors to the financial sector. It comprises institutions that offer money deposits, management, and loans to individuals and other firms. Banks make up for most of the money market and are responsible for regulating and ensuring ethical conduct. Many banks offer various financial services, such as investments and insurance, under their subsidiary brands. The most prominent banking institutions in the financial sector are Wells Fargo (NYSE: WFC), Goldman Sachs(NYSE: GS), and JPMorgan Chase(NYSE: JPM).
- Fintech: Fintech is another subsector of the stock market’s financial segment, which offers services related to money. Fintech companies provide services to individuals and companies using technology. PayPal (NASDAQ: PYPL), Visa (NYSE: V), and Square (NYSE: SQ) are some of the biggest names in the fintech world.
- Cryptocurrencies: Blockchain is the technology that gave birth to all cryptocurrencies in the world today. The most popular and significant cryptocurrency in the market today is Bitcoin and Ethereum. Cryptocurrencies have become vastly popular in the last decade and have attracted a massive population of young investors and miners looking to invest in this sector.
- Insurance Sector: Insurance firms and institutions are an essential part of the financial sector in addition to banks. Most of these firms offer insurance-related services such as life insurance, health insurance, car insurance, property insurance, and other specialty insurance. Berkshire Hathaway (NYSE: BRK.A) is one of the biggest names in the financial market.
- Financial Services: Some institutions and companies do not provide banking or insurance-related services to people but are classified under the financial sector of the stock market. These companies and firms offer consultancy and investment-related services to people looking to invest their money. Some of the biggest financial services providers in this sector are S&P Group and CME Group.
In order to evaluate the financial stock prices, it is necessary to understand how the financial market functions. The different sub-sectors of the financial segment can have various influencing factors. For example, the factors influencing cryptocurrencies or the fintech companies may differ from other major subsectors.
Let us go over the influencing metrics of two major sub-sectors of the financial market, i.e., Banks and Insurers.
Interest Rates: A significant portion of the income for banks and insurance companies comes from their interest in the credit they give out to people. It is a deciding factor for most loans, mortgages, and financial institutions. Any change in the rate of interest can affect the profitability and hence the stock prices of banks. For example, A higher interest rate will help the bank get more revenue instead of a lower interest rate. However, it will also reduce the number of people taking credit, whereas a lower interest rate will attract a larger population.
Regulations and Legislations: Any change to the government’s rules and regulations can have immediate consequences in the financial and business sectors. An increase in informalities and strictness to adherence to policies and practices may benefit the customers and people. However, it induces a negative effect on financial institutions. On the other hand, if rules and regulations are too accessible, they create openings for fraud and illicit transactions, which can also be detrimental.
Efficiency Ratio: The efficiency ratio is an excellent indicator of the bank’s ability to generate more profit. A bank’s efficiency ratio is how much the bank spends to generate a certain amount in revenue. A lower efficiency rate means a higher rate of return and hence better profitability.
Financial stocks can be volatile and are susceptible to recession and several other factors. The political policies and economic growth factors play a vital role in the performance of financial stocks. The evaluation process to predict the future trends in financial stock prices can be pretty complicated and involves a lot of research and expertise in multiple fields.
If you are a day trader looking to invest in financial stocks and turn up a profit in short, then this sector is not for you. Financial stocks can be cyclical and are vulnerable to many things. Therefore they should only be invested in for a more extended period. Financial stocks can be a great addition to your portfolio and offer a high possibility for greater returns in the longer term.