The 2020 pandemic hit many companies hard, while other companies took it as a chance to grow, seemingly unaffected by the state of the world around them. NVIDIA (NASDAQ:NVDA) came out as one of those thriving businesses and achieved gains of 122% in 2020. The company’s graphics processing units (GPUs) were present and needed for trends that accelerated exponentially due to the pandemic, boost...
When people first hear of the possibility of investing in the financial sector, they usually think of banks as their only option. However, even though banks dominate the market, there are still many other financial-related activities you could also invest in.
Let’s take a look at what the financial sector has to offer:
- Banks: Any commercial bank, investment bank or universal bank.
- Insurance: Providers of property/casualty insurance, life and health insurance, specialty insurance and insurance brokers.
- Financial Services: Services related to investments and finance, without necessarily being banks or insurers.
- Mortgage Real Estate Investment Trusts: Companies that own mortgages.
- Fintech: Companies that develop tech to create new solutions for the financial industry.
- Blockchain and cryptocurrencies: Companies that develop products and services that make use of blockchain technology and cryptocurrencies.
Important metrics to analyze financial stocks with
If you are looking to invest in the financial sector, you can use several standard investment metrics. However, some come into play exclusively when dealing with this kind of market. Any financial sector investor needs to be aware of them.
For analyzing bank stocks
- Return on equity and return on assets: Any given company’s annualized profits as a percentage of their shareholder’s equity and total assets.
- Net interest margin: The difference between the interest rate a bank receives and the rates it pays.
- Efficiency ratio: How much does the bank spent to generate its revenue.
- Net charge-off ratio: How much of a percentage of the bank’s loans end up charging off as bad debts.
- Price-to-book: A bank-related alternative of the price-to-earnings ratio. This time, you divide a company’s stock price to that of its net asset value.
For analyzing insurance stocks
- Combined ratio: The total amount of money paid out as claims and the one spent on business expenses. A ratio of less than 100% equals an underwriting profit.
- Investment margin: How much money do the insurers make from investing the premiums they collect while waiting to pay them out for insurance claims.
Based on that, you can find and then focus your efforts on companies with excellent track of profit records and growth potential. These are the type of companies that show the most potential for promising results. Some examples include Berkshire Hathaway, JPMorgan Chase, Visa and Vanguard Financials ETF.
Not only are they great investment opportunities, but they are easy to understand. They can work as a starting point for you to find newer and bigger companies to invest in.
Look at the bigger picture
It’s valuable to keep in mind that financial stocks are highly vulnerable to recessions. The 2020 pandemic taught us that recessions could happen from out of nowhere.
When facing that kind of struggle, bank stocks are among the worst performers of the market, as they can maintain themselves with other people and businesses paying their loans back. When their debtors go bankrupt instead, they’re unable to pay their debts back, and the banks suffer in return. However, they’re among the better and most solid options for a long-term investment when facing safe market points.
Well, that fact still stands by itself. If you were to find a company that could manage itself through the pandemic, then you are facing an excellent opportunity for it to rise once again.
Try and find investment opportunities that you can maintain for a time frame of five years or more. Right now, it still represents a chance to add rock-solid stocks to your portfolio.