Bank of America (NYSE: BAC) is one of the U.S. financial service sector's critical components. With total assets of $2.26 trillion, it is the 2nd-largest bank by total assets in the U.S., behind JPMorgan Chase.
BAC is among the very few financial institutions that didn't just survive the COVID-19 pandemic but managed to remain profitable amid the severe economic downturn that followed. Even though the bank had to slash interest rates to provide loans to the pandemic ravaged economy, the net income rate still rose by 2%.
Maintaining profitability in such an economic situation is a remarkable feat considering that BAC, like most other top consumer banks, is a cyclical stock — stocks that perform well during a strong economy and badly during an economic downturn like a recession. Bank of America was able to pull this off because the bank focused on making a higher volume of loans while keeping expenses low.
Cyclical stocks like energy, tourism, aviation, consumer banking and others are influenced by consumers’ demand for goods and services. For instance, the economic expansion comes with increased demand for banking services, hotel services, aviation services, etc. In contrast, defensive stocks remain stable in sales and profitability irrespective of the economic situation due to constant demand for their products, (e.g., Coca-Cola, Johnson & Johnson, and including investment banks like Goldman Sachs).
How to Buy Bank of America (NYSE: BAC) Stock
As a first-time investor, you might think you need to have millions in your account before successfully trading or investing in stocks. However, you can get started with just a few dollars in your account with the correct information and broker.
Our guide will enlighten you on choosing the best brokers and how to buy stocks even as a complete beginner. To buy BAC stock or any other stock, you need to first sign up to a suitable online broker that matches your preference, then deposit funds after selecting an order type.
- Pick a brokerage.
The first step to trading or investing in BAC stocks is choosing and creating an account with a broker — a financial service provider that is authorized to buy and sell shares on behalf of retail (individual) investors. Different brokers have varying commission fees and charges. They also determine which investment you can trade or invest in and how often you can buy or sell stocks. There are many different alternatives to choose from, each with its advantages and drawbacks.
- Decide how many BAC shares you want.
After setting up and verifying your account with a broker, you need to decide how many BAC shares you want and can afford to buy. If you are on a budget, you can buy a fractional share as most brokers allow it. A fractional share is a subunit/division of a share.
For example, BAC's share price is over $1,000, but your budget is $500. You can decide to purchase less than 1 unit of BAC stock with your $500. The number of shares you choose to buy depends on how much capital you have and how diversified you want your portfolio.
- Choose your order type.
After determining how many BAC shares you want to buy, you need to choose how you want to carry out your purchase (what kind of order you wish to make). Your order type will determine how much you will pay per share and its execution time and more.
- Execute your trade.
Executing your order is as simple as depositing funds and completing your order. Immediately you place your order and your broker automatically executes it on your behalf.
Best Online Brokers
We’ve put together a comparison table below that can help you select the right broker for you.
Order Type Comparison
Popular order types you can choose from are:
A market order ensures you get your order as soon as possible at the current market price. A market order is ideal for stocks with high capitalization and large volumes of trade, like BAC. Although a market order is filed and executed as soon as possible, the stock market can be volatile. Stock prices can dip or rise before the order is carried out.
With a limit order, you can specify the exact price you want to make the purchase.
Your order is only executed when the stocks hit that price or lower. Say the current BAC price is $30 and you place a limit order to buy 100 shares of BAC stock with a limit price of $25. In this example, your broker would only fill the order when the price drops to $25 or less per share.
A limit order gives you and your broker a higher degree of control. You can set a maximum ceiling for the acceptable ask price and a minimum ceiling for the acceptable bid price. In contrast to a market order, a limit order is ideal for securities or stocks with small to medium capitalization, low daily trading volume and wide bid-ask spreads.
Some popular terminologies will reoccur as you master the art of placing an order in the stock market:
Bid: The bid price is simply the maximum amount of money a buyer is willing to pay for a share of a particular stock.
Ask: The ask is also commonly referred to as the offer price. It is the minimum price a seller is willing to sell or accept for a stock/security.
Spread: The difference between the lowest ask price and the highest bid price is the spread. For example, if the lowest ask price for 1 share is $6 and the highest bid price is $5, then the spread for the stock is $1.
Bank of America Stock History
Bank of America Corporation began business as Bank of Italy in San Francisco in 1904 but was later renamed In 1968. In 2007, the bank expanded into wealth management by acquiring U.S. Trust Corporation.
In 2008 it acquired Merrill Lynch & Co. Inc., an ill-timed decision that proved costly, leaving the bank with lots of bad debt. The U.S. government gave BAC a bailout of $20 billion and an additional $118 billion in guaranteed against the bad assets obtained from the Merrill Lynch acquisition.
Unsurprisingly, by February 2009, Bank of America stock had fallen to below $4 per share. After the drastic fall in 2009, the stock has risen steadily with the market. The stock gained +34.5% in 2013 and +15.7% in 2014. However, in 2015, the stock fell by -4.78%, rose to +33.33% in 2016 and +35.67% in 2017, before dropping in 2018 by -14.98% from the previous year.
In 2019 Warren Buffett's Berkshire Hathaway filed an application with the Federal Reserve in October to boost its stake in BAC above the 10% level. Shares of BAC gained 42.9%, easily beating the S&P 500 index's 28.9%.
The COVID-19 lockdowns brought the economy to a grind, and BAC stocks dipped from $35.64 per share in January 2020 to $19.67 per share in late March 2020. Vaccine success and additional stimulus package coupled with the gradual reopening of the economy brought a much-needed rebound for big banks. BAC shares rose as high as 17.1% in February 2021. It is poised to maintain a positive outlook as we ride out the pandemic.
Bank of America Exclusions for Retail Investors
Retail investors are often excluded from secondary offerings. Secondary offerings are mostly issued only to institutional investors. After an initial public offering (IPO), companies can issue new or closely-held shares to raise money. These new offerings are known as secondary offerings. Companies primarily issue secondary offerings to institutional investors with large pockets leaving individual investors excluded.
Is Bank of America a Good Investment?
There are many reasons to believe that BAC is a good stock to invest in. Relative to other major banks, BAC stock is very cheap, trading at 1.09 times its book value. JPMorgan Chase trades at a price-to-book multiple of 1.65. BAC can produce more profitability at its book value than JPMorgan Chase. Although JPMorgan Chase is a more profitable bank, its profitability comes at a high premium.
Again, BAC is a highly capitalized financial institution, pays a dividend of 2.3% to investors, and in recent times has grown its deposits and loan portfolio faster than other big-bank peers thanks to good management. In addition to outstanding leadership, the banks' willingness to invest in technology has significantly improved efficiency while giving it a competitive advantage over other less tech-focused rivals.
Tip: Supposed a company is liquidated and has to pay off all its liabilities. The book value, in theory, represents the amount payable to investors. Book value = total assets (TA) - total liabilities (TL).
However, don't misconstrue this as investment advice. BAC is a cyclical stock, and so if you believe the economy is set for good times, then BAC is an excellent stock to consider. But if you are bearish on the state of the economy, you should probably look at alternative investments.