Investing in the Financial Sector
Learn more about investing ETFs and stocks in the banking and financial service sector with our guide to the financial sector.
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Here’s what you’ll learn in this guide:
- How the financial services industry is the backbone of the U.S. economy
- How the Federal Reserve helps keep the financial system strong
- How FinTech startups are giving unbanked customers access to financial services
Learn more about investing in the financial sector.
The financial services sector is the backbone of the economy, providing consumers access to cash, and businesses with loans. Learn how financial services stocks can be part of a diversified portfolio.
Making cents of it all: What is the financial services industry?
You probably don’t think much about your bank–it’s where you go to get cash from an ATM, or you may write monthly checks from an account you have there, or it might be the place where you go to get a mortgage or a credit card.
While banks mostly operate invisibly in the background, the economy couldn’t function without a sound financial system. Banks provide the money that allows consumers to conduct their daily lives, and that greases the wheels of the economy.
While the banking sector is critical to consumers, it also provides a vital lifeline to businesses that depend on them to make deposits, or for loans and lines of credit. In fact, banks loaned small businesses more than $200 million in 2016, according to federal lending data.
There’s another component to the financial sector in the U.S. that’s important to know about. It’s called the Federal Reserve System.
The Federal Reserve is the central bank of the U.S. It comprises 12 district banks located throughout the country, which together are responsible for the monetary policy of the U.S.
The Fed’s mission is to oversee the health of the nation’s financial system. It attempts to keep the economy strong and growing by enacting policies that maintain low inflation and healthy employment levels. It does this primarily by adjusting interest rates and lending money to the nation’s banks.
What are the key financial stocks and companies?
The nearly 6,000 banks in the U.S. hold deposits worth about $12 trillion. That’s a staggering amount of money if you think about it. And it might surprise you to learn that just five financial institutions hold the deposits of nearly half the nation’s consumers.
The largest banks are JPMorgan Chase, Wells Fargo, Bank of America, Citigroup, and US Bancorp, in descending order.
While commercial banks and the Federal Reserve make up the traditional financial services industry, new technology is shaking up banks. And new financial services companies (such as Stash), known as FinTech companies, have started to disrupt the market.
Today, there are hundreds of such companies changing the way we bank, spend, lend money, accept payments, finance our businesses, apply for mortgages, and more.
One of the oldest and best-known is Paypal. You may not know it, but in the early days of the Internet, allowing people to pay for things online in a secure manner was a challenge. Paypal created a secure system that let people use either a credit card or a bank account to pay and accept payments for things online.
Paypal is currently a multibillion-dollar company. Now it too is facing disruption by a host of startups including Stripe, Apple Pay, Dwolla, and Square.
What’s happening in the financial industry?
Following the financial crisis, or Great Recession of 2008 and 2009, the banking industry wasn’t viewed favorably by many Americans. Numerous banks—including Wells Fargo, HSBC, and Bank of America—haven’t helped the public image of the industry, with their subsequent crises and scandals.
As a result, the industry has had something of a rehabilitation project on its hands.
Earning back customers’ trust has, for some financial companies, been a slog. But we’re now a decade out from the financial crash, and the economy is back on stable ground.
Regaling with the regulators
A slew of rules and regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, were placed on the industry following the financial crisis, in an attempt by lawmakers to avert another economic disaster. But many industry insiders felt that new rules were too stringent, and worried that they could lead to further consolidation in the industry, as smaller banks struggled to comply.
Dodd-Frank was the centerpiece of these regulations. Passed during the Obama administration, these rules have, for many years now, been targeted by industry lobbyists, who have been successful rolling them partially back.
Rolling back these regulations, some financial analysts say, could increase bank profits as banks have fewer operational restrictions.
However, doing away with regulations that have made banks more solvent since the crisis could create new risks, may tempt banks to engage in behavior that might be bad for consumers. And some banks have continued to engage in deceptive practices around mortgages and banking in general.
Challenges with the unbanked
An important subset of the consumer population remains “unbanked,” meaning that they do not use traditional banking services. In the U.S., as many as 9 million households are unbanked, meaning they have no access to banking services. And up to 24.5 million are underbanked, meaning their access to banks is limited, according to government data. Worldwide, up to 2 billion people are unbanked.
From an industry standpoint, the ranks of the unbanked and underbanked represent an untapped market segment. There are a number of small financial tech startups (Stash included) that are looking to engage with this segment, and the bigger banks aren’t far behind with new products and services meant to appeal to the financially underserved.
Investing in finance companies and banks
If you think the financial services sector is worth investing in, you can add finance companies and related businesses to your portfolio, and there are several ways to do it.
Investors in the U.S. can buy shares of stock in companies working in and around the industry on a publicly-traded exchange, or buy shares of a fund—such as an exchange-traded fund, or ETF—that offers exposure to these companies.
Buying banking and financial stocks
A single stock is just that, a share of ownership of a company. And you can purchase single stocks of companies in the financial services sector. For example, investors can purchase shares in companies like Bank of America, Citigroup, JPMorgan, Mastercard, and Visa.*
Investing in the financial industry ETFs (Exchange-traded funds)
You can also invest in the financial industry through exchange-traded funds (ETFs), which are baskets of investments bundled together as a single investment and then traded on an exchange such as the Nasdaq or NYSE.
When you invest in an ETF, you are effectively buying fractions of the companies within that ETF. The fraction size depends on the weight of the stock held in that fund. ETFs generally track an index–or group of investments that represent part of an industry or investment category.
ETFs vs Stocks
ETFs have become popular in recent years as they can give investors the opportunity to invest in the performance of a group of stocks, without having to buy every single stock in the fund or handpicking single stocks. They also may tend to be cheaper than actively managed funds.
ETFs can also offer diversification, which many consider to be an essential investing strategy.
Investing in the financial industry on Stash
*Listed investments currently available on Stash but not necessarily representative of all investments.
Investing with Stash
What is Stash?
Stash is a financial services platform that makes saving and investing available to everyone through education, personalized guidance, and mobile-first technology. Stash speaks to a tech-friendly audience, providing user-friendly education, and personalized guidance.
Stash is for everyone
Stash is for the millions of Americans who have been overcharged and underserved by traditional banks, brokers, and investment advisors. Stash is for people who want to take charge of their financial future but need a helping hand to get them started and see them along their journey.
If you are a U.S. citizen, permanent resident, or a certain visa holder, and are 18 years of age or older, you can sign-up for Stash here.
What Are The Fees?
Stash charges its customers $1 a month to maintain an investment portfolio for accounts with an average monthly balance below $5,000. For average monthly balances of $5,000 or more, the fee adjusts to 0.25% of the total balance you have in the account per year, charged on a monthly basis.
If you decide that a retirement account like a traditional or Roth IRA is suitable for your investing goals, you can open a tax-advantaged account with as little as $5. The fee is $2 a month for accounts with an average monthly balance of less than $5,000 or 0.25% per year, charged monthly, for accounts with an average monthly balance of $5,000 or more.
How is Stash Regulated?
Stash is as an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). The SEC is a federal agency that regulates the financial securities market, including exchanges, brokerage firms, and investment funds.
The SEC requires investment advisers, including Stash, to act in the best interests of their customers. It also regulates other financial services companies and requires them to provide customers with clear information about potential investments. It also guards against fraud and deception by financial services firms. (Note: Registration with the SEC does not imply a certain level of skill or training.)
You can find out more about Stash on the SEC’s website and its registration with the SEC.
What if Stash Goes Out of Business?
Stash has every intention of sticking around for the long term. However, if anything were to happen to Stash that required us to close up shop, you would maintain complete control of your brokerage account. All the investments in your Stash portfolio are owned by you. Your account will not face any penalties if anything happens to us.
That’s because your investments are held at a federally regulated broker-dealer called Apex Clearing Corporation. This company acts as a custodian for all the investments Stash customers purchase. Apex is regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Apex is also a member of the Securities Investor Protection Corporation (SIPC), which together protects your investments in case of bankruptcy of the company holding your investments.
Your current investments are covered up to a maximum of $500,000 total, including $250,000 in cash balances through the Securities Investors Protection Corporation (SIPC). SIPC coverage does not insure against the potential loss of market value. For uninvested funds, your Stash account is enrolled in something called the Apex FDIC-insured Sweep Program. And here are the details:
Stash accounts are enrolled in an interest-bearing Federal Deposit Insurance Corporation (FDIC) insured Sweep Program (“Sweep Program”) offered through our clearing firm, Apex Clearing Corp. Uninvested Cash in your Stash account will automatically be transferred into the Sweep Program and will earn interest based on the amount and duration of deposits and applicable interest rates. Deposits to the Sweep Program are covered by FDIC insurance up to the $250,000 limit per customer at each FDIC-insured bank that participates in the Sweep Program.
Once your cash balances are deposited with the participating banks under the Sweep Program, they will no longer be covered by SIPC.
Please ensure that you read the Terms and Conditions of the Sweep Program carefully. As with all investments, you should consider carefully if the Sweep Program meets your investment objectives.
Stash uses 256-bit encryption to secure your information, including personal data and fund purchase history. Stash further secures your account with Secure Socket Layer (SSL) technology, which ensures any and all information sent between Stash and its servers is protected.
Stash will never withdraw funds from your checking or savings account without your consent. In order to purchase any of the investments offered through Stash, you need to link a bank account to transfer funds and to make your desired investment purchase.
If you have more questions about whether it’s safe to link your bank account to Stash, send us an email. You can also read more about Stash’s security protocols here.
The Stash Team
You can reach out with any questions at [email protected] or simply call (800) 205-5164.
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This material has been distributed for informational purposes only and is not intended to provide investment, tax, or legal advice or a recommendation of any particular security, strategy or investment product. This material is confidential to the recipient and must not be reproduced or distributed to any other person without the prior written consent of Stash Investments LLC (“Stash”). This material has not been independently verified, is subject to updating and amendment and the material, information and descriptions contained herein are not intended to be complete. This material discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research. This material may not be current and Stash has no obligation to provide any updates or changes. Any reference to a specific company or security does not constitute a recommendation to buy, sell, or hold any such investment. This material does not take into account the financial position or particular needs or investment objectives of any individual or entity. Certain information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.
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