Best Financials Stocks for 2024: Investing in Financials

Review and Analysis

Overview

With finance having become an important part of the daily lives of people across the globe, financial stocks are today amongst the soundest investments in the stock market. People utilize the services of the financial industry on a daily basis, every time they use a bank card to pay for a purchase, when they pay a utility bill online or when applying for a loan, to name but a few instances. It is also important to point out that the financials sector has been treading on course with the technological boom of our times, and this is what gave rise to many digital payment companies in recent years. Companies such as Paypal Holdings (NASDAQ: PYPL) and Square (NYSE: SQ) have recorded impressive results, while at the same time and to remain on track traditional banks are also rapidly digitizing their systems.

If you are keen on investing in the financials sector, it is important to determine a list of the top financial stocks to focus your attention on, in order to discern those worthy and more suitable to add to your own investment portfolio.

The financial sector is quite an extensive one, made up of companies which cater to the needs of individuals as well as companies by offering different types of financial services, such as loans, savings, insurance, payment services, and money management. Thus, the financial sector includes those companies involved in retail and commercial banking, accounting, insurance, asset management, credit cards, and brokerage services.

Top Financial Stocks To Watch Right Now

As already mentioned, if you are consider to invest in financial stock and especially if you are a novice investor, it is best to focus you attention on mature stocks, belonging to financial sector companies whose line of work you can easily understand. Examples of such stocks, which would constitute smart investment choices, are:

• Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B): Waren Buffett’s firm may not be immediately viewed by all as belonging to the financial sector, but it is basically an insurance company which runs a huge reinsurance operation. Moreover, Berkshire is the parent company of GEICO and an investment in its stock gains investors an exposure to its own impressive stock portfolio, which includes large stakes in several major U.S. banks.
• JPMorgan Chase (NYSE:JPM) Being the largest U.S. bank and indeed the largest company of any kind in the financial sector JPMorgan Chase is an investment option few would dare to disagree with. Thanks to its vast operations in consumer banking as well as in investment banking, JP Morgan Chase has managed to consistently being recording some of the highest profitability metrics in the entire financial industry, thus definitely earning a spot on your watchlist.
• Visa (NYSE:V) is the operator of the world's largest payment network, and makes up a near-duopoly in the payment processing industry together with Mastercard (NYSE:MA). However, the global cashless payment market is absolutely huge and on a constant growing path, thus Visa has plenty of room to grow further. In fact, since it is currently processing about $9 trillion in payments annually, out of a total which exceeds $185 trillion, it is obvious that the only way forward is up for Visa and all cashless payment processors and these strong growth prospects rightly place Visa on the list of stocks you should closely watch.

Other top financial stocks that you should be closely monitoring if you have decided to include financial stocks in your investment portfolio are those of the Bank of America (NYSE:BAC), Citigroup (NYSE:C), BlackRock (NYSE:BLK), and Morgan Stanley (NYSE:MS).

Moreover, in the financial sector’s niche of exchange-traded funds (ETFs), a stock that deserves your attention would definitely be that of Vanguard Financials ETF (NYSEMKT:VFH). By investing in the Vanguard Financials ETF you can gain exposure to the financial sector in its entirety for a very low annual fee. Most of the fund’s assets are invested in the top, biggest financial companies, however it has holdings in over 400 different financial stocks, thus offering its investors the maximum possible exposure.

Types of financial stocks

The financial sector is not uniform, since it is made up of companies of different types, which vary considerably amongst them not only in terms of their actual offering and functions, but also in their size and distinct growth potentials. The main categories under which financial stocks are classified are as follows:

• Banks: As expected and since they are the longest established institutions dealing with money, banks and their stocks account for the greatest part of the financial sector. Banking institutions are further divided into three main categories, namely commercial banks, such as Wells Fargo (NYSE:WFC), providing deposit accounts and loans to individuals and businesses; investment banks, such as Goldman Sachs (NYSE:GS) mainly providing services to institutions and high-net-worth investors; and finally universal banks, such as JPMorgan Chase, serving the banking needs of both commercial and institutional clients.
• Insurance: The second-largest subsector of the financial sector is that of insurance companies. There is ample diversity in this segment as well, since it is made up companies providing property insurance services, casualty insurance services, life insurance services, health insurance services, car insurance services, as well as other specialty insurers and insurance brokers. Berkshire Hathaway features as the biggest company in this subsector.
• Financial services: There are also companies which specialize in the provision of services that are related to investing and investment markets in general, which are not banks or insurance companies, but general financial services companies. Indicative examples of companies coming under this category are the ratings agency S&P Global (NYSE:SPGI) and the futures exchange CME Group (NYSE:CME).
• Mortgage REITs: Another significant subgroup of the financial sector are Mortgage Real Estate Trusts, known as REITs in short, which are financial services companies which own mortgages and other financial instruments used in real estate.
• Fintech: Another booming subsector of the financial services sector is made up of the financial technology companies, known in short as fintech. Fintech companies spearhead the growth of their subcategory, but also the entire sector since they are developing pioneering solutions for the financial industry through modern technology and digital solutions. Prime examples of this subgroup are companies like Visa (NYSE:V), PayPal Holdings (NASDAQ:PYPL), and Square (NYSE:SQ).
• Blockchain and cryptocurrencies: Another rising subcategory in the overall financial spectrum is that of blockchain and cryptocurrency companies, which develop products and services using blockchain technologies and also operate in the field of digital currencies, such as Bitcoin (CRYPTO:BTC) and other altcoins.
• SPACs: Perhaps the least known subsector of the financial sector are special purpose acquisition companies, or SPACs. These are companies whose sole purpose is to take another company public and they have no other business operations of their own, but act as facilitators. Fittingly, SPACs are also known as "blank check" companies.

By the end of the guide, you should know the following:

• If Financials stocks is a good or a bad investment.
• How to buy Financials stocks.
• Where to buy Financials stocks.
• Which Financials share is best to buy now?.
• Financials stock price prediction: Where Will Financials stock Be in the next few Years?

Things we didn't like in Financials stocks investment

All the above-mentioned paint a very promising and optimistic picture as regards the future growth prospects of the AI field and thus of investments in AI stocks. However, inherent risk factors are also present when investing in AI, not least because still much is unknown about the future and most are not easy to predict accurately. In short, prior to investing in AI, one should keep in mind the following potential dangers and risk factors:

• Job destruction: Increased automation, i.e. the existence of computers that can think, will inevitably lead to certain tasks, and specifically low-skilled jobs, being performed better by computers rather than humans, and such computers will not be expecting a paycheck at the end of each month either. This means that many low-skilled job positions will be lost, leading people to unemployment, which could then lead to a chain of other problems.
• Lack of common knowledge: Computers do not have common sense, so many propose that they will never be able to think like humans. This is a major drawback of AI, as computers do not yet, and perhaps will never, possess the ability to process information from the surrounding environment and also factor in common sense and common knowledge when filtering and reasoning, to reach a conclusion or outcome.
• A threat to human innovation: Many fear that when humans continue to teach computers to think and perform tasks previously performed by humans, then we all become increasingly dependent on computers. Moreover, many fear that the exponential growth of AI, could limit human innovation, while others even point to the danger of AI systems being left unchecked and managing to supersede human beings in the long run.

Where Can You Buy Financials stocks

There are several online sites and platforms where people from across the globe can buy Financials at good exchange rates and with low or no transaction fees. To aid your quest we have comprised a list of some of the most popular Stock Trading platforms to buy Financials sector's shares from and your strongly advised to consult this list before making your first purchase of or investment in Financials industry.

Features to Look in Financials stocks

The effective analysis and proper evaluation of financial stocks will help interested investors discern, which financial stocks they should be investing in. To perform such an analysis and reach valid conclusions, standard, across the board metrics may be used, such as a stock’s price-to-earnings (P/E) ratio, however it is equally important to use metrics which are customised to this particular industry and sector and especially when evaluating bank stocks and insurance company stocks.

When analysing bank stocks, pay particular attention to the following metrics:

• Return on equity (ROE) and return on assets (ROA): these are two of the most commonly used metrics to reveal the profitability of banks. ROE expresses a company’s annual profits as a percentage of its shareholders’ equity, while ROA expresses these profits as a percentage of a company’s total assets. For the banking sector, a 10% ROE and a 1% ROA are largely considered to be the industry benchmarks.
• Net interest margin (NIM): This metric shows the difference between the average interest rate received by a bank and the average rate of interest the bank pays. The net interest margin is an important metric for a bank’s profitability, since many banks earn most of their profits by charging interest on the loans and money they lend out to customers.
• Efficiency ratio: Another illuminating metric is a bank's efficiency ratio, which in essence measures how much the bank spends to generate revenue. As such, the lower the efficiency ratio the better, as that indicates that a bank doesn’t have to spend a lot to generate income and that renders it efficient.
• Net charge-off (NCO) ratio: The NCO ratio shows the percentage of loans given out by each bank that the bank ends up writing off as bad debt at the end of each year. Thus, calculating this ratio is instrumental for drawing comparisons between different banks, as it is indicative of the actual quality of the assets in each bank’s portfolio.
• Price-to-book (P/B) ratio: The P/B ratio is the outcome of the division of a company’s stock price by the net value of its assets. As such, when evaluating bank stocks, this metric is equally important as the P/E ratio. Furthermore, an even more useful and smart metric to use is the price-to-tangible-book-value (P/TBV) ratio, since by only taking into account tangible assets and excluding intangible assets, which are difficult to accurately value, such as a bank’s goodwill and brand name, the results obtained are more reliable.

Similarly, when analysing insurance company stocks, pay particular attention to the following metrics:

• Combined ratio: To be able to calculate the combined ratio of an insurance company, you need to add all the business expenses paid out by each insurance company, including the money paid out as claims to insured customers. To determine the ratio, you must then divide the result of this addition by the income collected by the insurance firm as premiums. A combined ratio of less than 100% indicates that an insurance company is generating profit.
• Investment margin: This is a particularly important metric because it indicates how profitable the investments of each insurance company are. It is common practice for insurance companies to be investing the amounts of money the receive as premiums by clients as this makes more sense and is more profitable than merely holding that money. In fact, such investment income is often the primary source of profits for an insurance company and it thus important if an insurance company can achieve a high investment margin.

Future Outlook for Financials stocks

It is true that the stocks of banks and other financial institutions were amongst the worst hit during the COVID pandemic. In fact, interested investors must bear in mind that most financial stocks, and those of banks in particular, tend to be largely cyclical in nature. This means that they perform bad under bad economic conditions and during recessions. When unemployment is up and people’s income is affected, then both consumers and businesses face problems in making their debt repayments, forcing banks to endure large sums in bad debts.

Before proceeding to invest in financial stock, remember that this is a risky investment and your investment decisions must only be taken after careful research and analysis of the overall outlook for each particular financial company you are considering. Relying on just a couple of metrics is not enough and will not reveal the true picture, while at times the actual strength of a financial company itself is not enough to shield it from a fall in its stock price, since this is heavily affected by external factors, such as a decline in interest rates or a full-blown recession.

Finally, be aware that financial sector stocks are more appropriate and suitable for investors looking for long-term investment vehicles and that adding a top notch financial sector stock to your portfolio would be a very wise choice, only if your investment strategy allows you an investment with an investment time horizon of at least five years.

Risks of Investing in Financials stocks

Tips on How to Invest in Financials stocks and Make a Profit

There is no guarantee that you will make a profit when you invest in Financials. However, to give yourself the best chance possible we have hand-picked the three most valuable such strategies, which you can find below:

• Tip 1: Set your own specific Financial Goals
• Tip 2: Dollar-Cost Average Your Financials Investments
• Tip 3: Diversify Your Financials Investment

Overall Conclusion – Final Thoughts

In this guide, the aim wasn’t only to answer simple questions like “how to buy stocks of the Financials sector?” or “where to buy Financials stocks?”. Instead, the goal was to equip you with the relevant knowledge and insight to be able to see and understand the bigger picture as well as make your Financials stocks investment journey as successful and as profitable as possible!