![]() While these actions make the sector safer, it hurts their profits because this is extra money they can’t lend out or invest. The financial sector is heavily regulated, and it’s possible for the government to take further action, like requiring banks to increase their capital reserves even more. Government regulation can reduce profits. While the fintech innovations are exciting for new up and comers, they could disrupt established banks and other financial companies, adding an extra risk for their long-term prospects. While this is part of a financial company’s regular business model, should things go really bad, defaults can spiral and put an otherwise solid company into bankruptcy, like when the housing bubble popped and turned into the 2008 financial crisis.ĭisruption from technology. If a person or business cannot pay back their loan and defaults, the lender ends up writing off the debt. Not to mention, they may stop making payments on their existing loans. When people and businesses are struggling, they take out fewer loans, invest less and spend less on their credit cards, reducing revenue for financial companies. Financial stocks are cyclical and sensitive to economic downturns. Financial sector stocks have benefitted from innovations like blockchain, mobile payment apps and robo-advisors, laying the groundwork for more sector growth.Ĭyclical performance during recessions. ![]() Insurance companies can also earn more from their fixed income investments as bond interest rates go up. When they go up, however, banks, credit card companies and other lenders could increase their earnings by charging higher rates. Today, interest rates are near historic lows. When banks ran into financial trouble during the Great Recession, for instance, governments bailed many of them out.īenefit from rising interest rates. As a result, financial firms can count on special support during a recession or a financial crisis. The health of the financial sector has a direct bearing on the health of the global economy. This reduces their risk compared to the sector in the past.Ĭhance for government support in recessions. Today, financial firms are required to take more measures to avoid trouble, like holding higher minimum capital levels to protect against losses. ![]() The financial crisis of 2008 exposed problems in the financial sector that governments around the world have worked to address with regulation. ![]() More regulated after the Great Recession. While past performance is no guarantee of future success, it can be helpful to look backward when gauging investment opportunities. Over the past 30 years, the financial sector’s earnings have grown significantly faster than the economy as a whole, allowing financial companies to pay above average dividends to their shareholders and creating solid price-to-earnings ratios. Fintech covers companies working on new technologies for the financial sector, such as innovative payments companies and firms that develop cryptocurrency technology. This also includes support services for the sector, like credit bureaus and bond ratings agencies. Companies that provide services like credit cards, investment management and accounting are considered financial services firms. Insurers sell and manage various types of insurance policies, like health, life, property and liability. There are commercial banks, which mainly work with individuals and small businesses investment banks, which work with large institutions and high-net-worth investors and banks that do both. Banks form the foundation of the financial sector, providing deposit accounts and loans to businesses and consumers. Some of the key categories in this sector include: The financial sector also includes insurance companies, investment firms, financial tech (fintech) startups and service providers for the industry. While banks are a big part of the story, they’re hardly the only sort of companies active in this key stock market sector. Financial sector stocks belong to companies that offer investment banking, consumer banking, lending, insurance or credit card services.
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