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.

  1. What Distinguished Financial Services Sector from the Banks?

    Learn about the difference between the banking industry and the financial services sector and how to distinguish financial ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. How does investment banking differ from commercial banking?

    Discover how investment banking differs from commercial banking, the responsibilities of each and how the two can be combined ... Read Answer >>
  5. 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 >>
  6. 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 >>
Related Articles
  1. 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.
  2. Investing

    Benefits of Regional Bank ETFs over Commercial Banks (KRE, KBE)

    The SPDR S&P Regional Banking ETF offers a stable local alternative to broad-based multinational commercial banking sector funds.
  3. Insights

    The World's Top 10 Banks

    Learn more about the world's largest banks and how more financial power shifts eastward as China is home to four of the world's largest banks.
  4. Insights

    What Do the Federal Reserve Banks Do?

    These 12 regional banks are involved with four general tasks: formulate monetary policy, supervise financial institutions, facilitate government policy and provide payment 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.
  7. Insights

    A Brief History of U.S. Banking Regulation

    From the establishment of the First Bank of the United States to Dodd-Frank, American banking regulation has followed the path of a swinging pendulum.
  8. Personal Finance

    The World's Top 10 Investment Banks

    These banks come out on top as measured by revenue numbers, global reach, employee headcount, income, and a number of other factors.
  1. Bank

    A financial institution licensed as a receiver of deposits. There ...
  2. Commercial Bank

    A commercial bank is a type of financial institution that accepts ...
  3. Investment Banking

    A specific division of banking related to the creation of capital ...
  4. Limited Service Bank

    Any type of banking business facility that is located separately ...
  5. Services Sector ETF

    Exchange-traded funds (ETFs) that invest in either the consumer ...
  6. Financial Sector

    A category of stocks containing firms that provide financial ...
Hot Definitions
  1. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  2. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  3. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  4. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  5. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  6. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
Trading Center