Financial Sector

One of the ten sectors of the Global Industry Classification Standard (GICS), the financial sector is a category of stocks containing firms that, as the name implies, provide financial services. These services may benefit both commercial and retail customers, and include banks, investment funds, insurance companies, and real estate.

One of the ten sectors of the Global Industry Classification Standard (GICS), the financial sector is a category of stocks containing firms that, as the name implies, provide financial services. These services may benefit both commercial and retail customers, and include banks, investment funds, insurance companies, and real estate.

The financial sector tends to perform best overall in situations where interest rates are low. However, because of the varied nature of this sector, portions of it behave differently depending on which area of the financial industry those companies target. For example, the portion of this sector comprised of businesses that generate revenues from mortgages and loans tend to gain value when interest rates drop and more consumers take out loans. On the other hand, when the business cycle is in an upswing and interest rates begin to climb, businesses that derive revenues from investments tend to improve.

Critical to a Nation’s Overall Development

Banking systems and stock markets, the core businesses that make up the financial sector, enhance growth and contribute to both the reduction of a nation’s poverty and its generation of wealth. A strong financial sector provides reliable and accessible financial services to a nation’s population, bolstering resource allocation and economic growth. Other businesses found in the financial sector include insurance companies, foreign exchange services, credit card companies, venture capital firms, and others.

When economists and financial experts analyze a nation’s financial sector, they look at indicators that include the size and liquidity of the nation’s stock markets; the accessibility, stability, and efficiency of financial systems; and the migration of international workers. Migration of workers can affect growth and social welfare in both the countries from which the workers emigrate and the nation to which they move.

In the United States, the world’s largest and most influential economy, the financial sector accounted for over 50 percent of non-farm business profits in 2010, but only 7.5 percent of the national gross domestic product (GDP).

While the financial sector constitutes the largest sector for earnings and equity market capitalization, it is not the largest in terms of revenue or number of employees. It is also a slow growing and extremely fragmented sector, with the largest US financial sector company, Citigroup, accounting for only three percent of the market share for this industry. By comparison, Home Depot has a 30 percent market share in the consumer discretionary sector, and Starbucks has a market share of 32 percent for services.

Investing in the Financial Sector

For investors, the financial sector is easily one of the most complex and confusing sectors in which to invest. While it is possible to invest in individual companies, given the enormous diversity and relatively minuscule market share, most investors prefer to invest in funds. Mutual funds and exchange-traded funds (ETFs) often specialize in the financial sector. However, given the unique regulations regarding investments in this sector, many of these funds are, themselves, limited in the ways they can react to market conditions. Before investing in any of these stocks, speak to a qualified financial adviser to get the best advice on how best to enter into this portion of the market.