Industrial versus Financial Sectors. Now, when looking at two different sectors, like industrials and financials, we know that financials is a service business, and these companies have a very different business model than other companies like industrials that sell merchandise. Now, since financials sell an action or an intangible and not an actual product, this fundamental distinction in operations causes ranges of differences between the two sectors. And we'll take a look at a few. First, and probably the most obvious, is that industrials create a physical good, while financials, again, are a service business, and they sell an action or intangibles. Inventory. Industrials have large amounts of capital invested in inventory so that they can sell it to the end buyer. Of course, financials do not hold any inventory, as their product is their service. Expenditures. Well, because industrials and other manufacturing sectors need to invest money in property, plant, and equipment to a large degree, they have large amounts of overhead. On the other hand, financials and service businesses have less overhead. They do have some, but they pale in comparison to industrials. Assets. Now, assets for financial companies are predominantly financial assets, such as loans and securities. In contrast, the assets of most non-financial companies are predominantly tangible assets. And lastly, regulation. Now, the financial sector sees a high level of regulation compared to other sectors. And that's because an impairment in some part of the financial system then has the potential to spread throughout other parts of the financial system and thereby negatively affecting the entire economy. And that's known as systematic risk. So these are the major differences between service sectors and manufacturing type sectors. Now, they also have some similarity. Performance for both of these sectors tends to be sensitive to economic cycle, and they both tend to perform better in the early to mid-stages of the business cycle.
