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What is the "Financial Sector"?

Mary McMahon
By
Updated May 17, 2024
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The financial sector is a component of a nation's economy created by the ebb and flow of capital in the financial industry. Financial services include everything from personal banking to the insurance industry, and they can make up a sizable portion of a nation's economy. Evaluation of the true value of the financial sector can be complicated, as the financial industry involves a great deal of paper pushing which can sometimes be difficult to track and pin down.

Financial institutions like banks, insurance companies, brokerage houses, investment firms, and so forth are all part of the financial sector. They can trade capital in a variety of ways, including funds, derivatives, investments, debt instruments, and so forth, with much of the sector being dependent on the extension of credit. Consumers interact directly with this sector every time they apply for a credit card, deposit a paycheck in a bank, or take out a home loan, and these actions occur on a much larger scale between institutions and companies.

One of the pinnacles of the financial sector is Wall Street in the United States. As a physical place, Wall Street houses some of the biggest powerhouses in the global financial industry, including the New York Stock Exchange and numerous multi-billion dollar firms. Wall Street is also sometimes discussed as an entity, and a metaphor for the financial sector as a whole, especially in political campaign rhetoric.

The rise of this sector as a considerable source of economic clout occurred gradually, and it has allowed a few notable people and companies to achieve impressive net worths. Because financial services are such a huge part of the global economy, many nations have also attempted to regulate the financial sector to protect investors and the economy as a whole. Unregulated activities can lead to serious financial problems in periods of economic crisis, as these activities can directly contribute to crisis situations.

In the United States alone, the financial sector made up around 20% of the overall capitalization on the S&P 500, a popular measure of economic performance. In nations such as Ireland and Iceland, financial services made up an even larger portion of the national economy, which proved to be a fatal problem in the global economic slowdown of 2008. Both Iceland and Ireland experienced a radical fall from being among the top performing economies in the world to being among the lowest, thanks to the implosion of the financial industry.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGeek researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments

By CookieMonsta — On Jun 07, 2011

@letshearit- I definitely agree that we need stricter government regulations. However, there are a lot of people opposed to government regulation who would say that people need to learn to manage their money themselves. Although it is a nice idea to think that personal financial management is possible, it probably is not, and it is far beyond time for the government to step it. The value of the dollar has dipped low enough.

By popcorn — On Jun 06, 2011

@letshearit - I think that the financial sector in America already has enough of our government’s money wasted on regulating them. I think it should be the consumer's responsibility to research their involvement with the financial sector before jumping into anything.

In the case of mounting consumer debt and insurance related woes, people need to do a little research before believing what big banks and companies have to say. They need to be responsible for their choices. If you choose a mortgage that only ever touches interest, and never the principal, that is your mistake. All banks want is to make money.

By letshearit — On Jun 05, 2011

I believe that the financial sector in the USA needs a lot more regulation if we are going to see our dollar rise again, and create more employment for those in need.

While Wall Street is often targeted for all that ails our financial picture, the regulations not governing bank practices and credit cards, as well is mortgages is what has gotten us into so much trouble financially. Let corporations run amok without a leash is a recipe for disaster, as we have seen with the fall of so many of them over the last few years.

I think if we work to adopt stricter policies, and stop handing people things they can't pay for, we'll be able to create a more financially secure country for everyone.

By armapill — On Jun 05, 2011

Wow -- it really is incredible to see the amount of power that the financial sector has. I mean, I always sort of realized that it was far-reaching, but if you think about it, by this article's definition most adults have contributed to this sector of our economy at some point in their life.

And I would argue that it's even further reaching than the article states. I mean, think about it, apart from the banks, credit card companies, and other organizations that adults regularly interact with, there are some less-recognized, but very important components of this system, such as foreign exchange services (responsible for handling currency exchange and the like).

The financial sector has a large responsibility in our economic communication with companies and persons in other countries.

Mary McMahon

Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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