Comments on: Buying Bank Stocks or Not Buying Bank Stocks; That is the Question!

By: TStrump

TStrump — Mon, 22 Dec 2008 19:40:27 +0000

Ultimately, I plan on buying a bank stock but my feeling is to wait a bit – maybe 6 months or so??

By: Finance Matters

Finance Matters — Mon, 22 Dec 2008 17:09:40 +0000

I can’t see how they can make money if they don’t want to lend it, other than more gouging at the branch level with more fees etc.

By: Goalhunter

Goalhunter — Mon, 22 Dec 2008 16:39:23 +0000

True about that but they’ve had to revalue all their loan portfolios as well as obviously their investments. Brokerage assets and activity are down too. Banks are beaten at every front, but I don’t think any Canadian banks are at the tip of failure like many American banks were.

If they use this time to justify deep cuts in their labour then when the economy turns banks will be even better cash cows than they are now.

By: The Financial Blogger

The Financial Blogger — Mon, 22 Dec 2008 15:43:06 +0000

Goal Hunter,
you also have to keep in mind that I am talking about Canadian banks which are less affected by the credit crunch than other banks. They are well capitalized and should declare profit next year as well.

By: Goalhunter

Goalhunter — Mon, 22 Dec 2008 14:46:48 +0000

Traciatim: The company is valued at $150. They were worth $100 before (had $100 in the bank let’s say) and they just sold 5 more shares at fair market price adding $50 to their bank account., so now they’re worth $150 over 15 shares = $10/share. It is a bit more complicated because the market price of a company reflects all the hopes and dreams and potentials of that company . If the extra $50 allows them to finally finish a product worth milliions, then maybe the share price will rocket up. But if the $50 was a last ditch to inject cash into an insolvent company so they can make payroll one more time then the price may tumble.

Shareholders definitely don’t like it when companies issue shares at below market because that reduces the value of everyone’s shares. Companies do this all the time by granting employees stock options and shares for free. Issuing shares at market price or higher is ok.

Companies issue shares to get cash. They can get extra cash from either getting a loan, or issuing shares and either one is as good as the other. The company just decides which is the least expensive for shareholders. For example, in the 5 new shares example above the company had to sell 1/3rd of the company for $50 so that means that all the future profits are diluted by 1/3rd; althogh you’de hope the $50 would generate profits too. Maybe a bank loan would be a cheaper way to get the $50, but usually no business can get a bank loan for half of their value without it being very expensive.

By: Goalhunter

Goalhunter — Mon, 22 Dec 2008 14:29:30 +0000

Why specifically bank shares? Banking is the industry that basically caused, or at least is at the root, of all the problems we’re facing right now. Your friend is right in that if there are hidden disasters, they’ll be hiding for the bankers while disasters for the rest of us are not as hidden.

That said, banking is pretty much at the center of the economy. I think any share or index will return more than 1% over the next year or two.

By: Fabulously Broke

Fabulously Broke — Mon, 22 Dec 2008 14:28:14 +0000

I’d also go with TD if I were to buy stocks.

But I am not a fan of bank stocks because I just don’t ‘get’ them. I am more into Tech stocks as it is the industry I work in and I am most familiar with them.

Generally, I just stick to index funds. I hate guessing and I am OK with average returns.

By: Traciatim

Traciatim — Mon, 22 Dec 2008 12:44:13 +0000

I’m on board with buying the banks that are on the dividend aristocrat list. It would seem that they’ve worked very hard to get to that point, and it would be unlikely that they would want to throw such a designation away.

If I were buying, I would go with TD and RY; My perception of teh best customer service, and the biggest. Seems simple enough, and probably as good a selection tool as any.

I don’t quite understand what happens to the share value when a company issues more shares. For instance say Company Z has 10 shares at 10 bucks a piece putting the value at $100. They decide they need money so they issue 5 more shares at 10 bucks again, the current trading price. Are they now valued at $150 suddenly, or will the share price drop to $6.66 . . . or some combination of the two?

I suppose it depends on the company and situation, but am I following the math correctly? If it does damage the existing share holders, isn’t it nearly always a bad thing to issue new shares?