Investing in the Financial Sector
Learn more about investing ETFs and stocks in the banking and financial service sector with our guide to the financial sector.
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Here’s what you’ll learn in this guide:
- How the financial services industry is the backbone of the U.S. economy
- How the Federal Reserve helps keep the financial system strong
- How FinTech startups are giving unbanked customers access to financial services
Learn more about investing in the financial sector.
The financial services sector is the backbone of the economy, providing consumers access to cash, and businesses with loans. Learn how financial services stocks can be part of a diversified portfolio.
Making cents of it all: What is the financial services industry?
You probably don’t think much about your bank–it’s where you go to get cash from an ATM, or you may write monthly checks from an account you have there, or it might be the place where you go to get a mortgage or a credit card.
While banks mostly operate invisibly in the background, the economy couldn’t function without a sound financial system. Banks provide the money that allows consumers to conduct their daily lives, and that greases the wheels of the economy.
While the banking sector is critical to consumers, it also provides a vital lifeline to businesses that depend on them to make deposits, or for loans and lines of credit. In fact, banks loaned small businesses more than $200 million in 2016, according to federal lending data.
There’s another component to the financial sector in the U.S. that’s important to know about. It’s called the Federal Reserve System.
The Federal Reserve is the central bank of the U.S. It comprises 12 district banks located throughout the country, which together are responsible for the monetary policy of the U.S.
The Fed’s mission is to oversee the health of the nation’s financial system. It attempts to keep the economy strong and growing by enacting policies that maintain low inflation and healthy employment levels. It does this primarily by adjusting interest rates and lending money to the nation’s banks.
What are the key financial stocks and companies?
The nearly 6,000 banks in the U.S. hold deposits worth about $12 trillion. That’s a staggering amount of money if you think about it. And it might surprise you to learn that just five financial institutions hold the deposits of nearly half the nation’s consumers.
The largest banks are JPMorgan Chase, Wells Fargo, Bank of America, Citigroup, and US Bancorp, in descending order.
While commercial banks and the Federal Reserve make up the traditional financial services industry, new technology is shaking up banks. And new financial services companies (such as Stash), known as FinTech companies, have started to disrupt the market.
Today, there are hundreds of such companies changing the way we bank, spend, lend money, accept payments, finance our businesses, apply for mortgages, and more.
One of the oldest and best-known is Paypal. You may not know it, but in the early days of the Internet, allowing people to pay for things online in a secure manner was a challenge. Paypal created a secure system that let people use either a credit card or a bank account to pay and accept payments for things online.
Paypal is currently a multibillion-dollar company. Now it too is facing disruption by a host of startups including Stripe, Apple Pay, Dwolla, and Square.
What’s happening in the financial industry?
Following the financial crisis, or Great Recession of 2008 and 2009, the banking industry wasn’t viewed favorably by many Americans. Numerous banks—including Wells Fargo, HSBC, and Bank of America—haven’t helped the public image of the industry, with their subsequent crises and scandals.
As a result, the industry has had something of a rehabilitation project on its hands.
Earning back customers’ trust has, for some financial companies, been a slog. But we’re now a decade out from the financial crash, and the economy is back on stable ground.
Regaling with the regulators
A slew of rules and regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, were placed on the industry following the financial crisis, in an attempt by lawmakers to avert another economic disaster. But many industry insiders felt that new rules were too stringent, and worried that they could lead to further consolidation in the industry, as smaller banks struggled to comply.
Dodd-Frank was the centerpiece of these regulations. Passed during the Obama administration, these rules have, for many years now, been targeted by industry lobbyists, who have been successful rolling them partially back.
Rolling back these regulations, some financial analysts say, could increase bank profits as banks have fewer operational restrictions.
However, doing away with regulations that have made banks more solvent since the crisis could create new risks, may tempt banks to engage in behavior that might be bad for consumers. And some banks have continued to engage in deceptive practices around mortgages and banking in general.
Challenges with the unbanked
An important subset of the consumer population remains “unbanked,” meaning that they do not use traditional banking services. In the U.S., as many as 9 million households are unbanked, meaning they have no access to banking services. And up to 24.5 million are underbanked, meaning their access to banks is limited, according to government data. Worldwide, up to 2 billion people are unbanked.
From an industry standpoint, the ranks of the unbanked and underbanked represent an untapped market segment. There are a number of small financial tech startups (Stash included) that are looking to engage with this segment, and the bigger banks aren’t far behind with new products and services meant to appeal to the financially underserved.
Investing in finance companies and banks
If you think the financial services sector is worth investing in, you can add finance companies and related businesses to your portfolio, and there are several ways to do it.
Investors in the U.S. can buy shares of stock in companies working in and around the industry on a publicly-traded exchange, or buy shares of a fund—such as an exchange-traded fund, or ETF—that offers exposure to these companies.
Buying banking and financial stocks
A single stock is just that, a share of ownership of a company. And you can purchase single stocks of companies in the financial services sector. For example, investors can purchase shares in companies like Bank of America, Citigroup, JPMorgan, Mastercard, and Visa.*
Investing in the financial industry ETFs (Exchange-traded funds)
You can also invest in the financial industry through exchange-traded funds (ETFs), which are baskets of investments bundled together as a single investment and then traded on an exchange such as the Nasdaq or NYSE.
When you invest in an ETF, you are effectively buying fractions of the companies within that ETF. The fraction size depends on the weight of the stock held in that fund. ETFs generally track an index–or group of investments that represent part of an industry or investment category.
ETFs vs Stocks
ETFs have become popular in recent years as they can give investors the opportunity to invest in the performance of a group of stocks, without having to buy every single stock in the fund or handpicking single stocks. They also may tend to be cheaper than actively managed funds.
ETFs can also offer diversification, which many consider to be an essential investing strategy.
Investing in the financial industry on Stash
*Listed investments currently available on Stash but not necessarily representative of all investments.
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