The financial sector is the stock sector comprising the stocks of all companies that engage in the provision of financial services to retail and commercial customers. The companies that fall under the financial sector include real estate operations, commercial and retail banks, investment funds and insurance funds.
The stocks of the financial sector perform best in the stock market when interest rates are low, because the bulk of this sector’s revenue come from loans and mortgages. People patronize these companies when interest rates fall. However, the companies in this sector suffer a downturn when interest rates rise.
The performance of this sector is an indication of the overall economy of a country. When the economy of a country improves, there will be more capital projects and an increase in personal investments. Therefore, new projects need financing with a resultant increase in the number of loans in demand. The increase in the performance of the stocks of this sector indicates an upswing in the economy.
If the financial sector is weak, the average consumer suffers. Financial companies provide mortgages to homeowners, loans for businesses and capital projects, and insurance to customers. Therefore, an inefficiency in the sector that leads to restriction of financial services to consumers will decrease the growth of small business and real estate.
Subsectors under the Financials Sector
Under the financial sector are companies or industries that engage in financial services in the following subsectors:
1. Diversified Financials: Consumer Finance, Capital Markets (Asset Management and Custody Banks, Diversified Capital Markets, Investment Banking and Brokerage, and Financial Exchanges and Data), Diversified Financial Services (Other Diversified Financial Services, Multi-Sector Holdings, and Specialized Finance), and Mortgage Real Estate Investment Trusts (REITs)
2. Banks: Banks (Diversified Banks, Regional Banks) and Thrifts and Mortgage Finance
3. Insurance: Multi-line Insurance, Life and Health Insurance, Property and Casualty Insurance, Insurance Brokers, and Reinsurance
In a thriving economy, the stocks of the companies under the financial sector perform optimally, and investors are encouraged to buy the stocks of the sector in the stock market.