Be Aware if You Want to Invest in Bank Stocks

Kimberly Watson, Editor in Chief
August 30, 2012 /

It is a fact the events during then past four years have displayed the risks associated with investing in bank stocks. They have a record for being regarded as one of the highest trading commodities, which motivated buyers, new and established.

This has been shown to have been somewhat misguided. While the downturn in the capital market was evidenced in insurance and bank stocks the manufacturing and service related sectors prospered. This showed why fortunes were lost by investing in bank stock and other financial services stocks.

Banks frequently provide the most liquid shares on the exchange and those investing in bank stock should create the awareness of the key indices, related to performances, by which every bank could be measured.

Various reports show that should you be researching the market for investing in bank stock, it is preferable to conduct a thorough screening of the banking sector. This would be designed to determine which banks failed to produce positive average returns on assets during the past five years.

Although profitability is an excellent aspect, this must be compared with the preferred banks of Africa which are expanding into new territories and tapping into new market segments.  At the same time, they are maintaining constant growths of assets and seeking to acquire smaller competitors. This mechanism accordingly translates into improved profitability, due to the banking industry’s conduciveness to building economies of scale.

When considering, investing in bank stock, the challenge for any bank is to be able to lend the greatest sum of money for the best return. Over zealousness created a situation whereby some banking institutions were tempted into lending substantial assets to various non-creditworthy clients.  On default by these clients, the loans were written down to zero balances, which was significantly detrimental to growth and profitability.

As with any investment, investing in bank stock is related to value. The seemingly most profitable bank could result in costing you money if the price of your investment is too high. The dividend yielded is related to value and profitability and recorded generous dividends also imply efficient management. As reductions in dividends can significantly affect the share price of stock, most banks will not raise dividends above sustainable levels.

 

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