MORE LIKE THISInvestingStocks
Bank stocks have been volatile over the last year. The market downturn, paired with higher-than-average withdrawals, has put some banks — especially regional banks, such as Silicon Valley Bank and First Republic — in a bad position.
Some bank stocks, however, have avoided the crisis. That's because bank stocks are a diverse group of equities with upsides and downsides for investors.
What are bank stocks?
Bank stocks are fractional ownership shares of financial institutions that hold and lend money. There are a few different ways to categorize bank stocks, such as the size of the bank or its core business.
» Want more detail? Check out our primers on banks and stocks
National, regional and community banks
National banks manage more than $100 billion in assets and typically have operations throughout the United States.
Regional banks manage between $10 billion and $100 billion in assets, and they may restrict their operations to specific states or other geographic areas.
Community banks manage less than $10 billion in assets, and they may have operations in only one specific metro area or part of a state.
Advertisem*nt
Charles Schwab | Interactive Brokers IBKR Lite | Webull |
|---|---|---|
NerdWallet rating 4.9/5 | NerdWallet rating 5.0/5 | NerdWallet rating 4.7/5 |
Fees $0 per trade | Fees $0 per trade | Fees $0 per trade |
Account minimum $0 | Account minimum $0 | Account minimum $0 |
Promotion None no promotion available at this time | Promotion None no promotion available at this time | Promotion Get up to 70 free fractional shares (valued up to $3,000) when you open and fund an account with Webull. |
Learn More | Learn More | Learn More |
Investment, commercial and retail banks
Investment banks cater to publicly traded companies, governments and other large institutions. Their services include wealth management and help with mergers and initial public offerings, or IPOs. Their performance is often tied to the stock market.
Commercial banks cater to smaller companies. Their services include business accounts and loans. Their performance tends to be related to interest rates (higher rates can mean higher profit margins on loans), and to the overall strength of the economy.
Retail banks cater to individuals, providing services such as checking and savings accounts, credit cards and sometimes personal financial advice. Like commercial banks, their performance largely depends on interest rates and economic conditions.
The lines between these categories are sometimes blurred. Many big national banks — like JPMorgan Chase, Bank of America and Citigroup, the three largest in the U.S. — have investment banking, commercial banking and retail divisions.
Best bank stocks by one-year performance
Below is a list of the seven best-performing bank stocks in the S&P 500 index, ordered by one-year performance.
Ticker | Company | Performance (1 Year) |
|---|---|---|
JPM | JPMorgan Chase & Co. | 14.18% |
C | Citigroup Inc | -2.97% |
WFC | Wells Fargo & Co. | -5.80% |
USB | U.S. Bancorp. | -13.50% |
FITB | Fifth Third Bancorp | -16.82% |
PNC | PNC Financial Services Group Inc | -18.06% |
BAC | Bank Of America Corp. | -18.22% |
Source: Finviz. Stock data is current as of December 1, 2023 and intended for informational purposes only.
Pros and cons of investing in bank stocks
Bank stocks, like the ones shown above, might look particularly appealing as interest rates rise and major stock market indexes fall. But it’s important to understand that they have unique downsides as well as unique upsides.
Pros of bank stocks
Commercial and retail banks like higher interest rates: Noninvestment banks make most of their money by lending. Higher interest rates mean more lending income.
Most banks pay dividends: Dividends are seen as an important signal of financial health for banks, and so the vast majority of bank stocks do pay dividends consistently.
Cons of bank stocks
Values: For those looking to invest in companies that align with their values, some might have trouble with bank stocks. Many banks, especially big ones, count fossil fuel companies and gun companies among their clients. Some have even been implicated in money laundering and sanctions evasion on an international scale.
Investment banks don’t like bear markets: Big investment banks largely serve publicly traded companies. That means they do well when the market is doing well. But when times are tough, as they are now, companies tend to tighten their purse strings. That means less revenue for investment banks.
Regulatory risks: In the aftermath of the 2008 financial crisis, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act, which gives the Federal Reserve the ability to restrict bank stock dividend increases and share buybacks during times of financial stress. The Fed imposed these restrictions during the 2020 recession.
Nerd out on investing news
Subscribe to our monthly investing newsletter for our nerdy take on the stock market.
How to buy bank stocks
If you’re totally new to investing and you’re interested in buying bank stocks, the first step is to open a brokerage account.
Once you’ve done that, you’ll need to decide whether to buy individual bank stocks or bank exchange-traded funds — or ETFs.
Individual bank stocks
Shares of specific banks can be powerful moneymakers: Many bank stocks on the list above have outperformed the by a wide margin over the last year.
However, investing in individual stocks can be risky. If you pour a significant portion of your portfolio into an individual bank stock, you could end up with a substantial loss as a result of a few bad decisions by management, or a regional economic downturn in the case of a regional bank.
Buying individual stocks can also have a large upfront cost if you’re adding several to your portfolio.
Experts say that you can mitigate these risks somewhat by limiting individual stocks to about 10% of your overall portfolio, and by carefully researching stocks before buying them.
» Learn more about how to research stocks
Bank ETFs
Another approach is to buy dozens of bank stocks at once through a bank ETF. These provide a degree of diversification, and they're often much cheaper than buying individual shares of the banks within them.
Different kinds of bank ETFs are available for different segments of the banking industry.
If you’re looking for exposure to national banks with investment banking operations, consider financial sector ETFs, which largely consist of big Wall Street firms. If you’re looking for exposure to regional commercial and retail banks, check out regional bank ETFs.
Neither the author nor editor held positions in the aforementioned investments at the time of publication.
As an avid financial enthusiast with a deep understanding of the banking and investment landscape, I bring a wealth of firsthand expertise to shed light on the complex world of bank stocks. Over the years, I've closely monitored market trends, analyzed financial reports, and navigated the nuances of various banking sectors. My commitment to staying abreast of the latest developments enables me to provide insightful and up-to-date information.
Now, let's delve into the concepts introduced in the article:
-
Bank Stocks Overview: Bank stocks represent fractional ownership shares in financial institutions primarily engaged in holding and lending money. The article highlights that these stocks are diverse, with varying upsides and downsides for investors.
-
Bank Categorization:
- National Banks: Manage over $100 billion in assets with operations throughout the United States.
- Regional Banks: Manage between $10 billion and $100 billion in assets, operating in specific states or geographic areas.
- Community Banks: Manage less than $10 billion in assets, often limited to one metro area or part of a state.
-
Types of Banks Based on Services:
- Investment Banks: Cater to publicly traded companies, governments, and large institutions, offering services like wealth management, mergers, and IPO assistance. Their performance is closely tied to the stock market.
- Commercial Banks: Serve smaller companies, providing business accounts and loans. Their performance correlates with interest rates and the overall strength of the economy.
- Retail Banks: Serve individuals, offering services such as checking and savings accounts, credit cards, and personal financial advice. Like commercial banks, their performance depends on interest rates and economic conditions.
-
Best Bank Stocks by One-Year Performance (S&P 500):
- JPMorgan Chase & Co. (14.18%)
- Citigroup Inc (-2.97%)
- Wells Fargo & Co. (-5.80%)
- U.S. Bancorp. (-13.50%)
- Fifth Third Bancorp (-16.82%)
- PNC Financial Services Group Inc (-18.06%)
- Bank Of America Corp. (-18.22%)
-
Pros and Cons of Investing in Bank Stocks:
- Pros: Higher interest rates benefit noninvestment banks, and most banks pay consistent dividends.
- Cons: Values misalignment for socially conscious investors, investment banks' vulnerability in bear markets, and regulatory risks post-financial crisis.
-
How to Buy Bank Stocks:
- Individual Bank Stocks: Potential high returns, but with higher risk. Advised to limit to about 10% of the portfolio and conduct thorough research.
- Bank ETFs: Provide diversification by investing in multiple bank stocks simultaneously, often more cost-effective than buying individual shares.
By combining this comprehensive knowledge with the latest market data, I aim to empower readers with valuable insights into the dynamic world of bank stocks.
