The Finance sector is the backbone of the economy. Investing in the finance sector has become a necessity. Adequate finance is a pre-requisite for any company’s survival. A sound finance industry implies a fast flow of money in the economy. This sector mainly involve the companies providing financial services to all other industry participants. There are many blue-chip companies leading and dominating the industry but there are a few small and mid-cap companies as well. This sector provides a broad range of services, which cater to the needs of the whole economy. These services include banking, insurance, etc. The problem, which arises, is that when people think of financial services, they mainly recognize banking as an instrument. However, in modern world, except for banking there are hundreds of important services and products, which the industry participants of the finance sector provides.
Why Invest in the Finance Sector
There are various reasons due to which innumerable investors have been attracted towards this sector. We will now look at some vital reasons for investing in this sector:
• EVER-BOOMING INDUSTRY
The finance sector has shown consistent growth and expansion over the past few decades. It is expected to perform in the same way in the future as well. The main reason behind this is that the demand for money, capital and finances is never going to reduce. The services provided by the industry participants of the finance sector fulfill human wants. Since, human wants are unlimited and never ending, we can expect this sector to give huge returns in the future.
• INVESTOR’S CHOICE
The financial services sector attracts the maximum number of investments from the investors of Wall Street. It attracts 25% of all the impact investments, which is greater than the total impact investments in the energy, health care and agriculture combined.
• BEDROCK OF ALL INDUSTRIES
The financial services form a bedrock for all types of companies and individuals in the economy. All units in the economy, starting from individuals to industries, need finance for subsistence, growth and prosperity.
• ESSENTIAL FOR ECONOMIC GROWTH
A sound and adequate finance sector says a lot about the economy. The financial services sector is the road hog of a country’s economy. It provides capital and liquidity to all the industry participants whenever there is a need for it.
• DIVIDEND INVESTING APPROACH
Many stocks of the financial services sector pay regular dividends to its investors. Investors looking out for investing opportunities, which are safe and provide good returns in the long term can consider these dividend-paying stocks as a good investment opportunity.
• DIVERSITY OF THE SECTOR
There are a huge number of participants in the finance sector. The magnitude and size of the sector is vast and the companies involved in providing financial services are classified under various sub-sectors. The finance sector contain an investment opportunity in these sub-sectors:
III. Financial Services
IV. FinTech & Cryptocurrencies
Thus, an investor can invest in any of the companies under these sub-sectors.
Participants in the Finance Sector
There are enormous number of participants in the finance sector. An investor has a huge range of opportunities and choices of stocks to select from. This makes the sector a diversified one. There are 1044 stocks and more than 2000 cryptocurrencies listed in the finance sector. These stocks range from companies engaged in providing banking services to companies engaged in dealing in crypto transactions and services.
Let us have a look at the participants in the sector.
Finance Stocks to Look Out For
Financial services is a broad range of more specific activities such as banking, investing, and insurance. Financial services are limited to the activity of financial services firms and their professionals while financial products are the actual goods, accounts, or investments they provide. Majority of the investors are confused between various stocks. Here, I have listed a few stocks in the finance sector that are conglomerates in their respective sub-sectors.
• JP Morgan Chase (NYSE: JPM)
It is the largest American Investment Bank and Financial Services providing agency. Its headquarters are located in New York. It provides valuable investment banking and asset management services. Its market capitalization is $492.4 billion and its dividend yield is 2.23%.
• Southside Bancshares inc. (NYSE: SBSI)
It is one of the best stocks in the thrift and mortgage industry. It is headquartered in Texas. It provides consumer and commercial loans, municipality loans, etc. Its market capitalization is $13.97 billion and its dividend yield is 3.2%.
• MasterCard (NYSE: MA)
MasterCard is a leading financial services provider company having its headquarters in New York. It provides credit services for issuers of the card. It provides money on credit through its credit card. It is a conglomerate in the financial services and FinTech industry. Its market capitalization is $364.3 billion and its dividend yield is 0.48%.
• MetLife (NYSE: MET)
It is an abbreviation of Metropolitan Life Insurance Company. It provides life insurance services and is the largest life insurance provider in the US. Its market capitalization is $56.6 billion and its dividend yield is 2.97%.
(NOTE: These stocks are not recommendations made by us. It is just a list of stocks of few industry leaders that are diversified in different sub-sectors. The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein.)
Perils and Risks to be Aware of
The financial sector looks very profitable and remunerative. However, every good investment opportunity comes along with an equivalent amount of risk. There are certain risks, which need to be considered before investing in the financial services industry. I have detailed a few and the major ones:
• Insolvency risks: The biggest problem the finance sector is facing is the problem of insolvency of its borrowers, issuers and customers. Various banks and NBFCs are also turning out to be insolvent. Hence, the investor should consider the debt-repaying capacity, the leverage and the earnings of the company in which he is planning to invest.
• Economical risks: The investors also need to consider the policy followed by the Central Bank regarding the lending, borrowing and investing of finances. If the Central Bank sets high interest rates of lending, then no borrower/ issuer would be willing to borrow money from banks. High interest rates would also increase the chances of defaults and NPAs of banks as well as customers and borrowers.
• Reputational risks: You might have observed that many companies in the financial services industry have a subsidiary. If the subsidiary defaults to due non-repayment of debt or running into huge losses, then the parent company’s reputation would be at stake even though it would be have good amount of earnings under its bag. This might result in a huge fall in its stock price.
One has to consider the various fundamental aspects of the company before investing in the finance sector. I have listed down a few criteria on which an investor should focus before deciding whether to invest in a financial services company or not.
• Return on Equity
• Debt Repaying Capacity
• Retained Earnings
• Efficiency Ratio
• Price to Equity Ratio
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This sector has attracted investors for the past few decades, and now it has become a part of a majority of the investors’ portfolios.
MarketXLS provides a ready-to-use template for facilitating comparison between various sectors. This analysis and comparison are made based on various parameters. They include Return on Equity, P/E Ratio, Dividend Yield, etc.
You can click here to go to the template.
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