Bank stocks may be amongst the hardest to analyze – but you can make a whole lot of money via money stocks. Then practice what you've learned with our free stock market simulation.
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Bank stocks are especially sensitive to overall economic fluctuations, more so than stocks in other unrelated sectors. Overall risk tolerance should be assessed before investing in bank stocks.
Here are three things to keep in mind when investing in bank stocks:
Banks are hella risky
This is a big one. The typical bank is leveraged by a factor of 10-to-1. This means that a small 10% decline in the value of its assets would completely wipe out its capital base…making it insolvent.
Cheap banks are…cheap
Banks fail. A lot. And often. A way to avoid this is to examine lenders’ price-to-book value ratio (shares cost relative to book value). A figure above 1.0 suggests means all is well. A ratio below 1.0 implies that a bank isn't earning its cost of capital. Or it could also mean that the market is anticipating future losses.
Find a bank with a high return on equity
Why invest in a bank stock? Well, with hope that it will generate a high return on equity, for as long as possible. Divide a bank's annual net income by its shareholders' equity. That’s its return. Invest only in banks that return around 15% on their equity (on average) through all stages of a business cycle.
What About Bitcoins?
Bitcoins have grown in popularity over the years and make for an interesting alternative investing opportunity. You can buy and sell bitcoin, and ride it’s price value, similarly to Forex. Although Bitcoin is still in the early phases of being adopted by the market, should it grow in popularity for a number of practical applications, the value will rise significantly. There are a number of websites where you can buy bitcoins safely, an investment that is well worth a look.
DIFFERENT KINDS OF BANK STOCKS
Banks are helpful in more than just a few ways. They transfer risk, facilitate transactions and provide liquidity. There are two major kinds of banks in North America:
These are the little baby financial institutions. Regional banks focus on one geographical area within a country and they essentially provide depository and lending services.
Major banks deal with international transactions and are mainly in financial centers like New York (though they do maintain some local branches)
HOW TO INVEST IN MONEY STOCK
The biggest factor that affects the credit card industry is the general health of the economy. Strong consumer confidence translates into more purchases. This generally implies greater use of credit cards. When confidence is low: consumers purchase less and they usually decide to cut back on their credit card usage. Investing in credit card companies can be super rewarding for investors. Consumers' unwavering need to use credit cards means these companies have the potential to be long-term winners.
When investing in credit card companies, choices include mutual funds, ETFs and stocks. Mutual funds and ETFs are best in terms of diversification, as they mix the stocks of credit card companies with banks and other financial service companies. Stocks are definitely the most direct course of action for investing in credit card companies. Popular companies in which to invest include American Express (AXP), Visa (V) and Mastercard (MA), etc.
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