What are financial stocks?

What are financial stocks?

Beginner

1st September, 10:14
Updated: 23rd September, 07:20

Money makes the world go round, and stock in companies that offer financial services is always in demand.

In this lesson, we’ll explain what financial stocks are, go through their typical characteristics, and let you know where they can be bought. We’ve also prepared a list of financial stocks you can consider for potential buys if you’re looking to add to your portfolio.

What are financial stocks?

Financial stocks are stocks of companies such as banks, mortgage companies, stock market exchange operators, lenders, credit card companies, and financial technology (fintech) organisations that make up the gigantic global financial sector. 

Why do investors look for financial stocks?

No other industry can succeed without backing from the financial industry, and so there is always the need for companies to be thriving in the financial sector. From offering loans to financing initial public offerings, financial companies provide fuel for other companies (as well as billions of individuals) to live and do business every day. The best of those financial stocks have delivered huge gains over the years, making them attractive bets for investors. 

What are the defining characteristics of financial stocks?

1) They’re in the money business

Sounds simple, but it’s important to remember! Neither individuals nor business will get very far without the ability to acquire loans, invest their money, and finance their everyday lives. That means that while financial companies may evolve, their core services remain integral in any economic climate. 

2) Their overheads are relatively low

Companies that operate factories and carry large product inventory burn through lots of money in the everyday operations of their business. Financial companies on the other hand deal with money, moving it around digitally and thus requiring relatively less money to run their business. Those low costs fatten financial companies’ profit margins, which in turn boost their stock price.

3) They garner lots of government support

When the 2008 global financial crisis thrust many huge banks into grave danger, world governments responded by bailing out many of those banks, regardless of how culpable they were for the crash in the first place. Thus was born the term “too big to fail,” a reminder that if you invest in a certain class of financial stock, you can feel fairly confident that governments will at least partly protect your investment in times of crisis, as the ramifications of letting large financial institutions fail would be disastrous to society.

4) They’re often a good barometer of overall economic health

To fund their operations, businesses of all sizes rely on financial companies such as banks to provide loans and other forms of financing. So if loans, initial public offerings, and other major financial transactions are happening in large numbers, that’s a good sign for both financial firms and the economy as a whole. 

Here are some examples

If you’re looking to add some financial stocks to your portfolio, here are some options that are worth considering.

1) MSCI (MSCI)

MSCI is a global stock market index operator, and provider of portfolio analysis tools. Its stock has been a monster, more than doubling in price from year-end 2018 to June 2020.

2) Goldman Sachs (GS)

The investment banking giant is one of many financial stocks that got walloped during the coronavirus-induced market downturn of the spring, only to bounce back as the broad market rebounded. The size and influence of Goldman Sachs makes its stock a good bet for many investors.

3) American Express (AXP)

American Express’ stock has followed a pattern similar to Goldman Sachs, falling hard for about a month, bottoming out in late March, then working its way back up. The credit card provider’s stock was up more than 50% from its March lows as of June 2020.

4) Square (SQ)

Square is a mobile payment services provider that reported nearly $5 billion in revenue in 2019. The company’s stock was barely affected by the COVID-19 market downturn, and then began shooting higher. As of early June 2020 it had reached a 52-week high and kept riding higher.

How do I find financial stocks?

Several different websites offer screening tools that let you research the best financial stocks based on parameters such as earnings per share, revenue growth, and the stock’s relative price strength. But you can simply stay right here, on this site you can also examine some of the best financial stocks right here on this site, thanks to our monthly lists of financial stocks on the rise.

Visit this guide for more information on how to find financial stocks > 

Now that you’ve got to grips with financial stocks, keep learning by clicking to check out our next lesson about utilities stocks.

By Jonah Keri
Jonah Keri is a trader and analyst who spent 11 years at Investor's Business Daily covering the markets. He now writes about stocks, cryptocurrencies, and other investments for Invezz and about emerging technologies for private clients.
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