How to Invest in Banking

Savvy investors can cash in on gains in bank stocks.

Savvy investors can cash in on gains in bank stocks.

You can invest in the banking industry in many ways. Bank stocks can be a sound investment because they often pay dividends. In 2011, some of the big banks began to restore their dividend payments that went away during the financial meltdown that started in 2008, and many smaller and regional banks started making money again, which benefited their stock prices. Though banking stocks have always been volatile, banks that have increased deposits and loans offer a good chance for mid- to long-term growth.

Buy exchange-traded funds that specialize in banking. ETFs are a lot like mutual funds, except you can trade them on a stock exchange just like stocks. They pool investor's money to buy a variety of stocks. You can find ETFs that focus on the banking industry. Do this by using a free online stock screener, such as the ones at Yahoo Finance or Google Finance. Enter "banking ETFs" or "financial ETFs" in the screener's search field. You'll get a list of ETFs that invest in banks.

Consider mutual funds that invest in banks. You'll have the protection of spreading your investment across a lot of bank stocks at the same time. If one bank doesn't do well, the others might prosper and make up for it. Mutual funds will pay you dividends they receive from dividend-paying bank stocks.

Evaluate your 401(k) investments. You might already have some mutual funds that invest in banking stocks. Typically, 401(k) plans let you change what you're invested in once a year. If you're not already in a fund that holds banking stocks, you can move some of your money into one.

Buy individual bank stocks. You can do this through a broker or through an online trading account. Use stock screeners to search for bank stocks that fit your criteria. For example, you might search for bank stocks that pay high dividends, or stocks that are hitting new highs.

Open a self-directed IRA. You can put some of your retirement money from your IRA into bank ETFs, mutual funds or even individual bank stocks. Any dividends you receive will be tax-deferred because they'll stay in your IRA until you withdraw money at retirement.

Tip

  • Watch the long-term trend of your investments in the banking sector, and don't get panicky over their day-to-day volatility.
 

About the Author

Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.

Photo Credits

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