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These are some mature, easy-to-understand financial sector businesses that are smart choices for beginner investors:
As for financial sector exchange-traded funds (ETFs), the Vanguard Financials ETF (NYSEMKT:VFH) may be an excellent choice if you don't want to choose individual stocks. This index fund gives investors exposure to the entire financial sector for a low 0.1% expense ratio (annual investment cost). The fund provides exposure to hundreds of financial sector stocks, weighted according to their market capitalizations, so more of the fund's assets are invested in the larger financial companies.
In addition to the three companies already mentioned, top holdings include Bank of America, Citigroup (NYSE:C), BlackRock (NYSE:BLK), and Wells Fargo (NYSE:WFC).
Several different types of companies make up the financial sector. Companies in the financial sector vary widely by function, size, growth potential, and other factors.
Financial stocks can be broken into several categories, including:
Investors can evaluate financial industry investments by using both standard metrics, such as the price-to-earnings (P/E) ratio, and custom, sector-specific metrics. For the banking and insurance subsectors of the financial industry, there are some particularly important metrics for investors to consider.
These metrics are especially useful for analyzing bank stocks:
Financial stocks -- especially banks -- can be cyclical, meaning they’re vulnerable to losing value during recessions. When unemployment rises, consumers and businesses often struggle to pay their bills, which can lead to large amounts of bad debt for banks. Banks can be especially vulnerable to panics and crises, which have historically occurred about once a decade (including as recently as 2023, when several regional banks failed).
Be aware of the risks before investing and consider the overall outlook for a financial company (not just one or two metrics) when conducting your analysis. Also, remember that financial sector stocks are best suited as long-term investment vehicles. There are many factors that can influence bank stocks over shorter time periods that are very unpredictable.
Many factors can influence financial stock prices in the near term, and many of those factors -- such as weak economic conditions or falling interest rates -- have little to do with the strength of the business itself. If you have an investment time horizon of five years or more, then adding some of the best financial sector stocks to your portfolio is likely a wise choice.
When most people hear the term "financial sector," they think of banks. Although this is certainly the largest part of the financial sector, several other types of companies are included in the sector, as well.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.