Jasmine Birtles
Your money-making expert. Financial journalist, TV and radio personality.
How to Invest in Bank Stocks: A Beginner’s Guide
Ruby Layram
21st Mar 2025
If you’re looking to invest in the stock market, bank stocks can be an attractive option. Banks play a crucial role in the economy, and investing in them can offer stability, dividends, and long-term growth.
Over the past decade, some bank stocks have shown impressive growth. For example, JPMorgan Chase has more than tripled in value since 2010, thanks to strong earnings and strategic expansions.
But how do you actually get started? In this guide, we’ll walk you through everything you need to know about investing in bank stocks in the UK.
Why Invest in Bank Stocks?
Bank stocks are popular among investors for several reasons:
- Strong market presence: Banks are essential institutions with a long history of profitability.
- Dividend potential: Many banks pay regular dividends, offering passive income.
- Economic indicators: Banks perform well when the economy is growing, making them a solid long-term investment.
- Regulatory stability: Unlike some industries, banks are closely regulated, reducing the risk of unexpected failures.
Step-by-Step Guide to Investing in Bank Stocks
If you would like to add bank stocks to your portfolio, follow the simple process below.
It’s also worth noting that individual stocks aren’t the only way to invest. You can also invest via ETFs, mutual funds or even derivatives.
1. Understand the Banking Sector
Before you dive in, it’s important to understand how banks make money. They earn profits mainly through interest on loans, fees, and investments.
When interest rates rise, banks typically make more money, but economic downturns can impact their earnings.
2. Choose the Right Bank Stocks
Not all bank stocks are the same. Here are the key types:
- Retail Banks: Serve everyday customers (e.g., Lloyds, Barclays).
- Investment Banks: Focus on corporate clients and trading (e.g., Goldman Sachs, Morgan Stanley).
- Regional & Challenger Banks: Smaller, often digital-focused banks (e.g., Metro Bank, Monzo).
When choosing a bank stock, consider factors like profitability, loan growth, and how well the bank adapts to changes in the economy. It’s also a good idea to take a look at the bank’s reputation – look at recent news to get an idea of what people are saying.
3. Analyse Financials & Performance
Look at key metrics such as:
- Price-to-Earnings (P/E) Ratio: Helps assess whether a stock is over or undervalued.
- Return on Equity (ROE): Measures how efficiently a bank uses shareholder money.
- Dividend Yield: Shows how much you can earn in dividends relative to the stock price.
- Non-Performing Loans (NPLs): Indicates the bank’s exposure to risky lending.
We have a brilliant guide on how to research stocks like a pro which will walk you through this step in more detail. You also might want to take a look at our investing glossary to understand a bit more about these fancy investing terms.
4. Pick a Brokerage Account
To buy bank stocks, you need a brokerage account. Popular UK platforms include:
- InvestEngine: The best platform for investing in ETFs.
- Interactive Investor: Unlock commission-free trading on thousands of shares.
- Hargreaves Lansdown: One of the most reputable brokerages for UK investors.
Choose a platform that suits your needs, whether you prioritise low fees, research tools, or ease of use.
| Platform Name | What We Like | What We Don’t Like | Minimum Deposit |
|---|---|---|---|
| InvestEngine | The best ETF platform that offers zero commissions on stocks and shares, fully managed protfolios, and up to £4000 cashback for new ISA accounts. | Only offers ETFs, no access to cryptocurrencies | £100 |
| XTB | Zero commission on stocks and shares, invest in ready-made portfolios for passive investing, access over 6000 assets | XTB does not provide access to cryptocurrencies | £1 |
| eToro | Social trading, copy trading, free demo account, access to stocks and crypto | No pension options, high fees | $10 |
Here is a more comprehensive overview of our best UK investment platforms.
5. Decide How Much to Invest
Never put all your money into a single stock. Diversification is key to managing risk. You might want to invest in a mix of bank stocks and other sectors to balance your portfolio.
This is where ETFs can be a great option. ETFs allow you to invest in a basket of investments, without needing to buy lots of different stocks.
6. Make Your First Purchase
Once you’ve chosen a stock, use your brokerage account to buy shares. You can place:
- Market Orders: Buy instantly at the current price.
- Limit Orders: Set a specific price at which you want to buy.
7. Monitor Your Investment
Keep an eye on economic trends, interest rate changes, and bank earnings reports. Banks are cyclical stocks, meaning their performance depends on the health of the economy.
Risks of Investing in Bank Stocks
While bank stocks offer many benefits, they come with some risks:
Economic downturns:
Banks struggle during recessions and financial crises. For example, since the COVID-19 pandemic, Credit Suisse faced significant financial difficulties, culminating in major losses and a government-backed rescue by UBS in 2023. The bank struggled with risk management failures, exposure to collapsed firms like Archegos Capital, and declining investor confidence, leading to a dramatic drop in its share price.
Regulation changes:
Governments can introduce new rules that impact profitability. A good example here is Goldman Sachs which has faced challenges due to stricter regulations on consumer lending and capital requirements. The bank scaled back its retail banking ambitions, including its Marcus brand, after regulatory scrutiny and profitability concerns, highlighting how changing rules can impact long-term strategy and earnings.
Interest rate fluctuations:
Higher interest rates generally boost banks’ profitability because they can charge more on loans compared to what they pay on deposits. However, if rates drop, banks’ profit margins shrink, reducing their earnings.
Additionally, rapid interest rate changes can impact loan demand and default rates, further affecting bank stock performance.
Final Thoughts
Investing in bank stocks can be a smart move, especially if you’re looking for dividends and stability. By understanding the banking sector, researching stocks carefully, and managing risk, you can make informed investment decisions.
Ready to get started? Open a brokerage account, do your research, and start investing in bank stocks today!
Are you interested in learning more about investing? Why not sign up to the MoneyMagpie bi-weekly Investing Newsletter? It’s free and you can unsubscribe at any time if you find it isn’t for you.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
Leave a Reply