How to Buy Cheap Bank Stock
The best time to buy bank stocks (or anything for that matter) is when they're cheap. The challenge is determining which bank stocks are cheap or on sale in the market for a bargain. To do this, you will need to develop a way to identify when a stock is over- or under-valued when compared to other stocks in the same industry. The same logic applies to bank stocks. Thankfully, there's a ratio which helps investors to identify undervalued stocks; it is referred to as the price/earnings ratio (P/E).
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Instructions
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Review the definition of a price earnings ratio. The P/E ratio is calculated by dividing the current market price of the stock by the earnings per share. The market price can be found by looking up the current quote for the bank stock, and the earnings per share can be found by looking on the income statement which can be found in the Annual Report or 10K.
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Go to Yahoo!Finance. (See Resources.) Yahoo!Finance is the top rated investment research site on the Web according to Alexa.com. Click on the "Investing" tab and scroll down to "Industries."
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Click on Money Center Banks in the left hand pane. Scroll down to the middle of the page. You will see the following line in bold print: "More Top Performers: by Valuation, by Growth, by Financial Strength." Select Valuation. The P/E ratio should already be selected in the drop down menu. If it is not, select P/E ratio from the drop down menu.
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Choose the bank with a low P/E ratio. The P/E ratio is looked at as a price tag for banks. Low ratios are indicative of undervalued (cheap) stocks, and high ratios are indicative of overvalued (expensive) stocks. A low P/E ratio says that a company's earnings are higher (on average) than the current market price dictates.
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Select the three bank stocks with the lowest P/E ratio and research these stocks. Take time to read through their annual reports. Choose a stock to invest in and place a limit order with your broker.
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