Motley Fool: Bank on this stock

When Bank of America (NYSE: BAC) reported its earnings for the fourth quarter and full year of 2021, they exceeded expectations. The nation’s second-largest bank by assets appears to be a solid investment in today’s tricky market.

After nearly two years in a low-rate environment with lower loan demand, it looks like loan growth has finally returned and may even accelerate this year despite projected interest rate hikes from the Federal Reserve.

Bank of America is also positioned to benefit if the Fed raises interest rates, which it has signaled it will do. The bank estimated that a 1% interest rate hike would likely generate $6.5 billion in additional net interest income over the next year.

Meanwhile, Bank of America’s investment banking pipeline remains very healthy, and wealth management is trending well as advisers are able to meet with more customers in person again and increase the pipeline of new business.

Heavily linked to the economy, banks always come with some risk. If inflation and interest rate hikes accelerate faster than expected, that could slow loan growth and increase credit costs.

But the economy still looks very healthy – as does Bank of America’s future. And its stock pays a dividend, too, which recently yielded 1.8%. (That payout has been increased robustly in recent years.) Long-term investors might consider shares for their portfolio.

Ask the Fool

Q: I’m a new investor looking to open a brokerage account. Do I need to save up a certain sum to do so? – C.K., Amherst, Massachusetts

A: In the recent past you might have needed, say, $2,500 to open a regular, taxable account (versus an IRA account, which was often free). But these days, most of the big brokerages are offering $0 account minimums – and, frequently, on top of that, $0 trading commissions.

Since you’re new to this: Read up on investing, learn about mistakes to avoid (such as trading frequently and buying penny stocks), and aim to hold great stocks for the long term.

You can read reviews of good brokerages and compare them at both StockBrokers.com/compare and our site, TheAscent.com.

Q: What’s a “business model”? – D.H., San Ysidro, New Mexico

A: It’s the way a business makes its money. For example, you might think that Coca-Cola’s business model is making and selling sodas, but it actually just makes the syrup and lets bottling companies do much of the heavy work.

Many printer and razor makers don’t make much on their printers or razors; instead they focus on selling lots of ink and blades, respectively.

Similar businesses can have very different models: A traditional furniture company may sell costly, handmade bookcases while IKEA can charge much less for mass-produced bookcases (and sell many more of them) by shipping them unassembled and in flat, stackable boxes.

Some other (of many) business models feature direct-to-consumer sales (Girl Scout cookies), subscriptions (Microsoft’s Office 365), franchises (McDonald’s), advertising (YouTube) and peer-to-peer transactions (Airbnb).

When studying a company, it’s well worth spending time figuring out its business model’s risks and advantages to see how attractive it is.

My dumbest investment

When I first started investing, I came upon a penny stock that really looked promising. I got obsessed with it, doing online searches for it and following it on discussion boards every day and every hour.

I eventually bought in, and watched it jump up, then come back down fast.

What I did next led to a lesson I had to experience firsthand to really learn: I was so committed to the company that I kept buying shares as they fell closer to zero. Soon, my initial position of $500 had turned into a $35 position, for a 93% loss. Some 18 months later, the shares were at $0.05 apiece.

The moral of this story: Don’t chase losers; more importantly, don’t invest in penny stocks. Lesson learned – and luckily it was early. – F.D., online

The Fool responds: It can be instructive to think back to when you were “so committed” to the company and to ask yourself what made you so committed.

It’s generally best to steer clear of stocks that are falling sharply, as they often do so for good reasons – and it’s usually best to avoid all penny stocks (those trading for less than about $5 per share).

If you must buy more of a falling stock, you should first research it deeply.

And in general, favor stocks with proven products and services, growing revenue and earnings, and competitive advantages.