A:

Financial sector performance is very closely tied to the performance of other industries yet it balances investment by providing a means for investors to spread risk. Banks perform well during strong business cycles and provide returns consistent with market health. Interest rates impact bank performance and tend to improve performance with low interest rates that provide a liquid market for lending and borrowing. Banking services are consistently necessary during all economic conditions as borrowing and saving activity continues during down markets. Sectors with consistent demand in adverse market conditions provide a place for investors to maintain investment value when more lucrative options are not available.

To spread risk, investment should be spread across multiple banking companies and regions. Investment in regional banks and super regional banks can help protect financial sector investments from loss. Financial securities such as exchange-traded funds (ETFs) may also spread risk by allowing investment in multiple companies across an entire index. Regional banks limit financial services to a specific region. Stocks and ETFs of regional banks are readily available to investors.

Commercial banks provide financial services that traditionally have included the bulk of financial services consumed by the public. Underwriting services used to create financial instruments such as stocks have traditionally been conducted by investment banks. The distinction between these two categories has largely disappeared and modern banks may conduct commercial banking and investment banking services. Banks providing both services benefit from the consumer services and corporate investment markets. This broad range of services offers investors an opportunity to invest in businesses that serve a broad and diversified market. Financial services are used by most consumers and companies and continue to serve an important societal function. As part of an investment diversification strategy, investment in banking allows investors access to the profits gained from the ongoing use of banking services.

Past market downturns left financial services stock undervalued. Subsequent market recoveries increase the value of these stocks and provide potential returns for investors. Undervalued bank stocks may be an important part of an investing strategy. Bank stocks tend to perform better during good economic conditions. Improving economic conditions allow for higher profits and improved investment performance. During bad economic conditions, financial institutions are still necessary and continue to provide services to the market. Banks serve a diverse market when offering financial products to corporate consumers from a broad range of industries and to consumers. Different industries have different corporate environments and respond to different pressures. Customers of different industries support growth and ongoing business that benefits from different amounts of success. Successful industries may make financial institutions more successful through the use of financial services. Banks are positioned to respond to market needs and demands in a range of different environments. Investors benefit from investing in financial services companies that respond well to market changes and maintain a competitive advantage. Investing in a broad range of financial services companies allows investors to potentially achieve better returns.

RELATED FAQS
  1. How does the division of regional and national banks affect investing in the banking ...

    Research the difference between investing in regional versus national banks, and find out which strategy is the best fit ... Read Answer >>
  2. What are the biggest trends affecting the profitability of the financial services ...

    Explore the trends that most affect the financial services sector, including the role of central bank policy and challenges ... Read Answer >>
  3. What's the difference between investment banks and commercial banks?

    Understand the principal differences between investment banks and commercial banks, and the areas of banking services that ... Read Answer >>
  4. What is the average profit margin for a company in the banking sector?

    Learn what the average profit margin is for companies in the banking sector, along with other evaluation metrics often used ... Read Answer >>
  5. What economic indicators are important to consider when investing in the banking ...

    Find out which economic indicators are most useful for investors in the banking sector, especially those influenced by central ... Read Answer >>
  6. How do investment banks help the economy?

    Learn more about the functions of investment banks in a modern economy and how investment banks have been treated differently ... Read Answer >>
Related Articles
  1. Personal Finance

    Banking Has Changed: What Does It Mean For Consumers?

    Banks have long been leading spenders on technological innovations. Learn the key changes in the banking industry and what institution is right for you.
  2. Insights

    The Role of Commercial Banks in the Economy

    We interact with commercial banks daily to carry out simple financial tasks. That said, the function and creation of a commercial bank is anything but simple.
  3. Investing

    KRE: SPDR S&P Regional Banking ETF

    Learn about the SPDR S&P Regional Banking Fund, an exchange-traded fund (ETF) that invests in equities of regional banks located in the United States.
  4. Insights

    How Investment Banks Make Money

    Take a look at methods through which investment banks make money, such as investment research, asset management, and brokerage and underwriting services.
  5. Investing

    How Bank of America Holds 1/8 of All U.S. Deposits

    Bank of America isn't America's central bank, but given its size and spread, you could be forgiven this misapprehension.
  6. Investing

    (KBE) S&P Bank SPDR ETF: Top 5 Holdings

    Take a look inside the KBE S&P Bank SPDR ETF and obtain an overview of the companies that comprise its top five portfolio holdings.
RELATED TERMS
  1. Bank

    A bank is a financial institution licensed as a receiver of deposits. ...
  2. Retail Banking

    Typical mass-market banking in which individual customers use ...
  3. Commercial Bank

    A commercial bank is a type of financial institution that accepts ...
  4. Business Banking

    Business banking is a company's financial dealings with an institution ...
  5. Open Banking

    Open Banking is a system that provides a user with a network ...
  6. State Bank

    A state bank is a financial institution, which a state has chartered ...
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Risk Tolerance

    The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important ...
  4. Donchian Channels

    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
  5. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
  6. Moving Average - MA

    A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out ...
Trading Center