Financial stocks are a broad category of publicly traded companies, including banks, insurance companies, financial service providers, and more. Companies in the financial sector can produce excellent long-term returns, and we think there are some that look more attractive than others.
Best financial stocks for beginners
These are some mature, easy-to-understand financial sector businesses that are smart choices for beginner investors:
| Name and ticker | Market cap | Dividend yield | Industry |
|---|---|---|---|
| JPMorgan Chase (NYSE:JPM) | $831.4 billion | 1.84% | Banks |
| Visa (NYSE:V) | $663.5 billion | 0.69% | Diversified Financial Services |
| Bank of America (NYSE:BAC) | $385.5 billion | 2.04% | Banks |
1. Berkshire Hathaway
NYSE: BRK.A
Key Data Points
Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) is not always thought of as a financial sector stock. However, it is an insurance company at heart, so it is technically a part of the sector. Led by legendary investor Warren Buffett, Berkshire is the parent company of more than 60 businesses, including GEICO, BNSF Railroad, Duracell, and many others. Investors in the company gain exposure to its massive stock portfolio, which also happens to own large stakes in financial heavyweights Bank of America (BAC -1.04%) and American Express (AXP +1.64%).
2. JPMorgan Chase
NYSE: JPM
Key Data Points
JPMorgan Chase (JPM -1.74%) is the largest U.S. bank by assets and has an excellent track record throughout a variety of economic environments. It's tough to make a case against JPMorgan Chase as an investment if you want bank stock exposure in your portfolio. The bank consistently posts some of the highest profitability metrics in the industry and has vast operations in both consumer and investment banking.
3. Visa
NYSE: V
Key Data Points
Visa (V +0.84%) operates the world's largest payment network. Along with Mastercard (MA +1.09%), Visa has half of a near-duopoly over the payment processing industry. But don't make the mistake of thinking Visa doesn't have room to grow. The company currently processes about $13 trillion in annualized payment volume per year via about 4.8 billion branded debit and credit cards.
4. Vanguard Financials ETF
NYSEMKT: VFH
Key Data Points
Revenue
Analyzing financial sector investments
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:
- Return on equity (ROE) and return on assets (ROA): Two of the most widely used metrics to express bank profitability, ROE and ROA are a company's annualized profits expressed as percentages of shareholders' equity and total assets, respectively. A 10% ROE and a 1% ROA are often considered to be the industry benchmarks.
- Net interest margin (NIM): Most banks earn the majority of their profits by simply loaning money and charging interest to customers. The difference between the average interest rate a bank receives and the average rate it pays, plus certain expenses, is known as its net interest margin.
- Efficiency ratio: A bank's efficiency ratio measures how much money the bank spends to generate revenue. For example, a 60% efficiency ratio means that a bank spends $60 to generate every $100 in revenue. Lower efficiency ratios are better.
- Net charge-off (NCO) ratio: Calculating this ratio can be useful for comparing asset quality among different institutions. The NCO ratio indicates the annualized percentage of a bank's loans that it ends up writing off as bad debt.
- Price-to-book (P/B) ratio: When valuing bank stocks, the price-to-book ratio can be just as useful as the P/E ratio. The P/B ratio is a company's stock price divided by its net asset value. The price-to-tangible book value (P/TBV) ratio may be even more useful than the P/B ratio because it excludes assets tough to value, such as brand names and goodwill.
Two important metrics for analyzing insurance stocks
- Combined ratio: To compute this ratio, first add (combine) the amount of money an insurance company pays out in claims to the amount of money the company spends on other business expenses. Divide that amount by the amount the insurance company collects as premium income. If an insurer is a profitable underwriter, the result should be less than 100%.
- Investment margin: Insurers aim to profit from underwriting policies. They can also make money by investing the premiums they collect until they use the money to pay any insurance claims. How profitably an insurer invests -- its investment margin -- is important since investment income is often the primary source of profits for an insurance company. Most insurance companies invest in rather safe fixed-income instruments like Treasury securities and corporate bonds.
Related investing topics
Investing in the financial sector for the long term
Financial stocks can make excellent long-term investments, but there are a few risk factors to keep in mind:
- Financial stocks -- especially banks -- can be cyclical, meaning they’re vulnerable to losing value during recessions.
- Banks can be especially vulnerable to panics and crises. We saw this as recently as 2023.
- Many factors, such as weak economic conditions or falling interest rates, can influence financial stock prices in the near term.
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.
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