# Financial Sector Explained: Key Players, Importance, and Economic Impact

## What Is the Financial Sector?

The financial sector is the part of the economy made up of firms and institutions that provide financial services to commercial and retail customers. This sector comprises a broad range of industries, including banks, investment companies, insurance companies, and real estate firms.

The financial sector supports economic stability by providing loans, mortgages, and insurance. A robust financial sector is vital for a healthy economy. The financial sector has a heavy influence on the S&P 500 and affects both Wall Street and Main Street.

### Key Takeaways

*   The financial sector is integral to the economy, providing essential services such as loans, mortgages, and insurance, and often reflecting the economic health of a nation.
*   It includes a wide array of industries, such as banks, investment companies, insurance firms, and real estate businesses, making it a significant part of developed economies.
*   The sector benefits from a low-interest-rate environment, as this promotes increased investment and capital projects, contributing to economic growth.
*   Financial institutions are critical in enabling businesses to expand, supporting consumer activities, and helping individuals save and prepare for retirement.
*   Investing in the financial sector can be both an opportunity and a risk, as factors like interest rate fluctuations and regulatory changes significantly impact its performance.  
      
      
    

![Financial Sector: A section of the economy made up of firms and institutions that provide financial services to commercial and retail customers.](https://www.investopedia.com/thmb/jSHkDOETMbPDKQdvMjHH7b6tJII=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Financial_sector_final-b61f6b0d9c7e451d8c0da71b0a84535a.png)

*— Ivestopedia / Michela Buttignol*

## How a Strong Financial Sector Fuels Economic Health

The health of the economy depends, in large part, on the strength of its financial sector. The stronger it is, the healthier the economy. A weak financial sector typically means the economy is weakening.

Many people equate the financial sector with [Wall Street](https://www.investopedia.com/terms/w/wallstreet.asp) and the exchanges that operate on it. But there's much more to it than that. The financial sector is one of the most important parts of many developed economies. It is made up of [brokers](https://www.investopedia.com/terms/b/broker.asp), financial institutions, and money markets—all of which provide the services needed to help keep Main Street functioning every day.

In order for an economy to remain stable, it needs to have a healthy financial sector. This sector advances loans for businesses so they can expand, grants mortgages to homeowners, and issues insurance policies to protect people, companies, and their assets. It also helps build up savings for retirement and employs millions of people.

The financial sector generates a good portion of its revenue from loans and mortgages. These gain value in an environment where interest rates drop. When rates are low, the economic conditions open up the doors for more capital projects and investment. When this happens, the financial sector benefits, meaning more economic growth.

### Key Industries Comprising the Financial Sector

As mentioned above, the financial sector is made up of many different industries, ranging from banks, investment houses, insurance companies, real estate brokers, consumer finance companies, mortgage lenders, and [real estate investment trusts](https://www.investopedia.com/terms/r/reit.asp) (REITs).

The financial sector is one of the largest parts of the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp). The largest companies within the financial sector are some of the most recognizable banking institutions in the world, including the following:

*   JPMorgan Chase (JPM)
*   Wells Fargo (WFC)
*   Bank of America (BAC)
*   Citigroup (C)

While these large companies dominate the sector, there are other, smaller companies that participate in the sector as well. Insurers are also a major industry within the financial sector, being made up of such companies as American International Group (AIG) and Chubb (CB).

### The Role of Investments in Strengthening the Financial Sector

Economists often tie the overall health of the economy to the health of the financial sector. When financial companies struggle, it negatively impacts consumers. Financial companies provide loans for businesses, mortgages to homeowners, and insurance to consumers. If these activities are restricted, it stunts growth in both small businesses and real estate.

[Financial stocks](https://www.investopedia.com/ask/answers/031015/what-economic-indicators-are-important-investing-financial-services-sector.asp) are popular investments in many portfolios. Most companies within the sector issue dividends and are judged on the overall strength of their financial health. During the [financial crisis of 2007-2008](https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp), the financial sector was one of the hardest hit, with companies like Lehman Brothers filing for bankruptcy. After an influx of [government regulation](https://www.investopedia.com/ask/answers/030315/what-impact-does-government-regulation-have-financial-services-sector.asp) and restructuring, the financial sector is considerably stronger.

> **Important**
>
> Financial ETFs like the Financial Select Sector SPDR Fund (XLF), the largest financial ETF, offer broad exposure to the sector.

## Navigating Opportunities and Risks within the Financial Sector

Some of the positive factors that affect the financial sector include:

*   **Moderately rising interest rates.** As rates rise, financial services companies can earn more on the money they have and on the credit they issue to their customers. 
*   **Reducing regulation.** Whenever the government decides to cut back on red tape, members of the financial sector will benefit. This means it could lessen cost burdens while increasing profits.
*   **Lower consumer debt levels.** Lower consumer debt reduces the risk of [defaults](https://www.investopedia.com/terms/d/default2.asp). This lighter load also means they may have a tolerance for more debt, further increasing profitability.

Conversely, investors should consider some of the risks that affect this sector as well:

*   **Rapid interest rate increases.** If rates rise too quickly, demand for credit, such as mortgages, could drop, which could negatively affect certain parts of the financial sector. 
*   **Yield curve flattening.** The financial sector may struggle if the gap between long- and short-term interest rates narrows too much.
*   **More legislation.** Government regulation can have a big impact on the financial sector. While it may help protect consumers, more red tape can bog down a business that operates in financial services.

## What Is a Financial Sector Job?

There's a plethora of jobs in the financial sector. Some of the most common [career paths](https://www.investopedia.com/articles/financial-careers/08/financial-career-options-professionals.asp) for those interested include analysts, planners, traders, and actuaries.

## What Are the Major Types of Financial Institutions?

Financial institutions play a critical role in providing financial services to individuals and businesses alike. The [major types of financial institutions](https://www.investopedia.com/ask/answers/061615/what-are-major-categories-financial-institutions-and-what-are-their-primary-roles.asp) are central banks, retail and commercial banks, internet banks, credit unions, savings and loans associations, investment banks and companies, brokerage firms, insurance companies, and mortgage companies.

## What Is Included in the Financial Sector?

The financial sector is wide-ranging and includes many areas including consumer finance, corporate finance, insurance, and real estate, among others.

## The Bottom Line

The financial section plays a vital role in supporting economic stability and growth by providing essential services like loans, mortgages, and insurance. A strong financial sector is indicative of a healthy economy, while weakness in this sector can signal economic downturns. There is a wide range of diversity within the financial sector, with key industries contributing to economic activities, such as banking, investment, insurance, and real estate. External factors, like interest rates and government regulations, can impact the financial sector's performance, affecting everything from consumer credit to corporate investments.

Opportunities for investment include financial stocks and ETFs. While both offer growth potential, there are inherent risks involved, such as those seen during financial crises. To make informed financial decisions, investors should monitor interest rates and regulatory changes. Remember, the financial sector's health often reflects the economy's overall health.