With so many thousands of stocks you could chose to invest in, it's helpful to start narrowing down the possibilities by organizing those with similar characteristics into buckets, from which you can pick ones you see as the strongest. One such bucket would be financial stocks.
Now, when you think financial stocks, the first thing that comes to mind may be retail banks, but this bucket includes a whole lot more than just those.
And even within that sub-group there is tremendous variety: JPMorgan Chase, and Bank of America are universal banks; investment banks like Goldman Sachs, private equity, or asset management banks have entirely different business models from the firm that operates your checking account.
And then there are REITs, mREITs, BDCs; insurance companies like American International Group; payment processors like Visa or technology companies like PayPal.
To help make sense of all these stocks and how they fit into the financials world, host Gaby Lapera, analyst Jay Jenkins, and special guest intern Emily Flippen sit down in this segment from The Motley Fool's Industry Focus podcast to talk financials from the top to the bottom.
A transcript follows the video.
This podcast was recorded on Jun. 20, 2016.
Emily Flippen: Sure, this comes from Michael Schramm. He's an intern here at editorial, and he asks, "what type of businesses are included in financials?"
Jay Jenkins: There's actually a surprising array of companies that are classified as financials. Most obviously, you'll see banks like JPMorgan or Bank of America or Wells Fargo, or any of the regional or community banks around the country or around the world. But drilling down into banks, there's investment banks, maybe Goldman Sachs is the industry leader, and the most well-known. But there's also a whole wide variety of investment banks other than these headline-catching national brands, whether it's in private equity or management or mergers and acquisitions. There's a whole subset there.
On the other side of financials, we also have specialized companies, like business development companies or real estate investment trusts, or even mortgage real estate investment trusts.
Gaby Lapera: And these are all fun because they all have acronyms. Most of the time, we refer to business development companies as BDCs, and real estate investment trusts as REITs, and mortgage real estate investment trusts as mREITs.
Jenkins: That's right. And these companies are all really cool because they have, typically, very large dividends. There are tax incentives for them to pay huge dividend yields. It's a small niche in the market, but it's really interesting, and really appealing to a lot of people, because it's not often that you can find a company with a 12% dividend yield, and the dividend is actually pretty legitimate and safe.
Lapera: Definitely. Then, on top of that, we also have insurance companies.
Jenkins: Insurance companies, from the very largest, like AIG, and some of these pure plays, all the way over to Berkshire Hathaway, which is more of a conglomerate these days, but really, at its core, it's an insurance company, and has been for 50 or 60 years now.
Lapera: We also have payment processors like Visa and MasterCard. And then we have some new players in the space like PayPal, and who knows what they're going to do with Venmo. I think everyone is holding their breath on that one.
Jenkins: The payment processors are an interesting niche, too. At a certain point, these companies all start to look the same. American Express is a good example. They're a payment processor, and everyone has seen their commercials and his heard of their brand. But they're also kind of like a bank. They make loans, and those loans have to be repaid. So they have parts of their business that function very much like a traditional bank. And the on the flip side, the other half of the company functions a lot like Visa or MasterCard, where it's all transaction-based.
Lapera: Yeah, I think that pretty much covers all of it. Can you think of any other financial companies, Emily?
Flippen: I think the better question is, what company isn't a financial company? There are a lot of businesses in there.
Jenkins: And later on in the week, I think the real question is going to be, what company is not a technology company in this day and age?
Lapera: That's so true.