Finance stocks in brief
Financial services — or finance — stocks cover many different types of companies which manage money, including banks, insurance firms, investment companies and real estate businesses.
Banks are perhaps the most well-known finance companies, as they provide the loans, credit cards, mortgages and deposit system upon which the world’s economy depends. Banks tend to be heavily influenced by external factors such as interest rate movements and wider economic growth. The FTSE 100 offers multiple banks including HSBC and Lloyds.
Insurance companies are also very popular financial sector stocks. These types of businesses provide policies to protect against financial loss; they tend to be more stable as premiums are based on very carefully calculated risks, but individual stocks can still struggle in the event of weaker economic growth or single event disasters. Legal & General is perhaps the best-known insurance sector stock in the UK.
Investment firms also make the financial sector cut, offering asset management, private equity and hedge fund services. Most investors will have heard of the likes of BlackRock and Vanguard, with these firms again highly correlated with wider economic growth. Meanwhile, real estate firms including REITs like the Supermarket Income REIT are also popular financial sector choices, though obviously sensitive to interest rates and property demand.
Perhaps the most-watched segment of the sector is Fintech stocks, which blend traditional financial services with cutting-edge technological advances to provide digital baking, payment processing and even block-chain services. They tend to be higher risk but with correspondingly magnified rewards on offer — with many growing sharply over the past few years. Top trends to watch in the Fintech segment include the emergence of artificial intelligence trading algorithms, ESG investing and new digital assets.
As a general rule, the largest finance stocks enjoy stable cash flow and a strong regulatory framework that makes them popular investments for individuals seeking lower risk companies. They also offer some diversification given the breadth the sector provides — but are usually sensitive to economic downturns, market volatility, or even competitive pressure as companies innovate.
Perhaps the most understated risks involve changing regulation or black swan credit risks — for example, the 2008 Global Financial Crisis, or more recently the collapse of Silicon Valley or the Eurozone Crisis. While the sector is heavily regulated, the world is more interconnected than ever before, which means that a single risk event can impact the entire sector.
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