The financial services industry is perhaps the most significant segment of the economy, leading the world in equity market capitalization and earnings. Large companies control this sector, but it also consists of several smaller companies and with them, many investment opportunities.
The financial services sector offers financial services to individuals and businesses. This section of the economy comprises an array of financial firms, including banks, finance companies, real estate brokers, investment houses, and insurance companies.
This industry is replete with investment opportunities as long as you know where to look. Today, we will examine the sector that the economy could not function without - the financial industry.
What is the financial sector, and why is it important?
A considerable part of the financial sector earns revenue from loans and mortgages. These sources of revenue rise in value as interest rates drop.
The economy’s health relies on the strength of its financial sector. The healthier it is, the stronger the economy. A weak financial sector often means the economy is declining.
The International Monetary Fund, or IMF, describes financial services as the method by which individuals or businesses obtain economic goods or services. One example is a payment system provider that offers a financial service by accepting and transferring funds between payers and recipients.
Companies in the financial services sector handle money. For example, a financial consultant manages assets and gives advice to a client. The consultant does not directly provide investments or any other product. They simply facilitate the transfer of funds between investors and the issuers of securities and other instruments. This service is a temporary task and not a tangible resource.
Failure of this sector can drag an entire nation’s economy down, which can lead to a recession. The economy will begin to suffer as capital starts to dry up. That is because lenders become more strict when lending. People lose their jobs, or there is a drop in wages, and consumers stop spending.
There is more to banking than most people think. Aside from retail banking, where an individual can acquire financial services like savings, checking accounts, mortgages, credit cards, and loans, there is also commercial and investment banking.
Commercial banking handles small and large businesses. Similar to retail banking, it offers financial services tailor-fit to the needs of companies.
Investment banks work with high-net-worth individuals and dealmakers only. Investment bankers secure access to capital markets, provide tax and wealth management advice, underwrite deals, advise businesses on mergers and acquisitions, and assist in the buying and selling of stocks and bonds.
Another important subsector of this industry is insurance. Individuals and businesses acquire insurance services for protection against death or disability, against lawsuits, and property loss or damage.
You usually engage with three types of people here.
- Insurance agents who represent the insurance company.
- Brokers, who represent the insured.
- Underwriters who evaluate the risk of insuring clients.
Meanwhile, reinsurers provide insurance to the insurers themselves.
Tax and accounting services
Accounting services provide accountants and bookkeepers who will ensure all financial records and statements are in order and comply with federal laws and generally accepted accounting principles.
Other services include tax filing, wire transfer, currency exchange, debt resolution, and credit card services and networks.
Accountants also do ancillary duties like making recommendations to C-suite staff and various departments or monitoring the effectiveness of accounting control procedures.
Investors can access stocks, bonds and other investment instruments through investment services. Brokers facilitate the buying and selling of securities, getting a commission in return. Investment partnerships, mutual funds, and hedge funds invest in the financial markets and collect management fees.
With the continuous development of technology, Robo-advisors are now available to investors. They provide portfolio management and financial advice using automated algorithmic trade executions and portfolio allocations.
Investing in the financial sector
The finance sector is generally used as an indicator of the overall health of the economy by analysts. If you are interested in adding the financial services sector to your investment portfolio, you can include finance companies and there are many ways to do it.
- Purchase banking and financial stocks
You can invest in single stocks of financial services companies. For instance, you can buy shares in JPMorgan, Bank of America, and Citigroup.
Financial stocks are popular investments to keep within a portfolio. Most companies within the industry issue dividends and are assessed on the overall stability of their financial condition.
- Invest in the financial industry exchange-traded funds
You can invest through ETFs. These are like baskets of investments bundled together as one investment, then traded on NASDAQ, NYSE, and other exchanges.
- Alternative equity and debt investmentsInvest
There are many alternative ways to invest in the financial sector as an accredited investor. Technology is driving new disruptive start-ups that offer investment opportunities for a portion of their future profits.
Factors that affect the financial sector
- Reducing regulation
Reducing regulations helps cut through red tape, benefitting the financial sector.
- Moderately rising rates
Financial services companies earn more when interest rates rise.
- Lower consumer debt levels
Consumers lessen the risk of defaults as they decrease debt loads. Likewise, a lighter debt load means they have more tolerance for debt, which increases profitability for these companies.
While investing in the financial sector may be an enticing financial move, there is no guarantee that you will experience success. Consider your investment objectives and the unique risk profiles of these investments before you immerse yourself in this sector.
As usual, a diversified investment portfolio can help mitigate your risk. As you attempt to generate wealth for yourself in the future, the financial sector is a solid inclusion in most balanced portfolios and we see this industry growing considerably more diverse and robust in the years to come.