Like any other financial entity, banks are also business organizations. They thrive in their business with great efforts and sincere endeavors. When a particular bank earns profits, its shareholders, CEO, owners, and regulatory authorities benefit. On the other hand, when the shares of a specific bank go down, its overall business goes down, and all people associated with the bank get affected. As a result, the business and customer base shrink in the coming weeks, months, and years. In worse-case scenarios, investors and bank account holders may lose the money invested/deposited. Let’s talk about the issue in detail and learn about it.
Why Does the Price of Shares of a Bank or Any other Business Organization Change?
To start with, an exchange is not a store but rather a bazaar (an organized market). You must know that issuers don’t determine the share prices. Instead, buyers and sellers decide the price of shares.
It works in the following order:
- If there are more sellers in the market, they sell shares at lower prices,
- If there are more buyers in the market, they start to compete with each other and sell at higher prices,
- Current quotes (market price) are the balance between supply and demand, the point of balance between the price sellers are willing to sell and buyers are eager to buy.
In the trading terminal, this balance is quite fragile and changes frequently.
Reasons Why Shares of a Bank May Go Up:
Good Business Report
As stated earlier, banks take all possible steps to include more and more customers into their orbit. Their executives sell loans, credit cards, insurance policies, etc., to increase their profit margins and capture a larger market share. When you buy a stock, you take ownership of the business- with all its entrails of income, debt, and assets at a certain proportion. The more shares you have, the higher the risk you carry. Therefore, banks actively respond to changes in financial indicators. If a bank consistently increases its profit, it remains in people’s demand compared to unstable competitors. Their shares are in demand even with higher prices. A good business report helps a bank up to a great extent. The cost of its shares starts to grow sharply.
Increase In Dividends
If a bank starts to share profits generously with its shareholders, it doesn’t go unnoticed. A bank may make huge profits with suitable marketing activities and favorable market conditions. If its owner starts sharing profits with shareholders and account owners, it creates a positive perception of the Bank. As a result, it increases the price of bank shares up to a great extent.
When many investors buy the shares of a particular bank for some idea, it can raise its share prices to a great extent. Some news, rumors, management promises, and other factors cause speculative growth. One must remember that it is easier to speculate in stocks with a small free float. If there is a small volume of shares on the stock exchange, you can disperse quotes to the desired values even with a small amount of money. Sometimes, organizations do it for evil intentions. For example- To artificially increase the company’s capitalization and attract more customers.
If a bank plans to buy back its shares, investors perceive it as a positive signal for numerous reasons-
- This indicates that the Bank is performing very well and investment in the equity is safe and
- It reduces the number of outstanding shares and increases earnings per share and dividends.
- A buyback made at an agreed maximum price also increases.
Buying back shares is a good thing for any bank. People follow this activity and act accordingly.
Always keep in mind that large investors monitor each other’s transactions, especially insider ones. Insiders include managers and top managers, directors, significant shareholders, partners, subsidiaries and parent companies, and affiliated companies. If investors see that management team members actively buy shares, they repeat the action. The bigger the insider deal is, the more interest is generated among ordinary stakeholders.
Reasons Why Bank’s Stock Fall
Falling Performance & Poor Financial Record
Due to a wide range of reasons (staff underperformance, economic slump, lousy image, negative perception in people’s mind), the overall value of the Bank’s shares. Therefore, it is standard in the life cycle of a financial organization. But when management fails to control the situation, the Bank may suffer a tremendous loss due to management’s failure to maintain sufficient liquidity and meet people’s expectations.
A Change in Management
In general, a management change is a chance for Bank to achieve better performance. At the same time, changing management at various levels is always stressful for both the team and the new manager, fraught with almost inevitable conflicts. A new CEO usually faces doubts. Bank employees have several questions. Will the new CEO disband the old team or gather a new team for himself? The performance of employees depends on how a new CEO behaves. Not everyone will survive when the management changes. But retaining those who are valuable to the bank and preserving human capital is the main task for the manager. He is more likely to make rash decisions at a younger age, less values consistency and professional authority. It is possible to dismiss the department and recruit new employees. But the cost of firing some, hiring and training others is so high that often the Bank does not rise to the lost level of professionalism of its employees after such a mass exodus. If there is a regular change in Bank’s management and senior staff, it may face losses due to wrong decisions.
A sudden change in bank management doesn’t affect investors almost instantly. Uncertainty arises when there is no clarity on how the new management team will behave. In general, banks communicate a change in management with their employees in advance. It allows investors to sell their shares in advance and avoid possible losses. It would help if you were careful when a bank is going through its essential transition phase. Timely action can minimize losses up to a great extent.
A Sharp Reduction in or Cancellation of Dividends
If many shareholders start dumping the share of Bank, then it creates a negative perception about the particulate banking brand. No benefit of holding a stake, lack of prophets, no positive outlook is some of the main benefits why shareholders will surrender the shares of a particular Bank. If such a happening happens in great numbers, it decreases the overall value of Bank shares.
Negative Insider Activities
If someone from the Bank’s top management sells their stake or most of it, this can be a wake-up call for other shareholders. Sometimes, it acts as a sell signal for ordinary shareholders. It means that something wrong has happend in the Bank, and top management is turning its shares into cash. On the other hand, you must make such a move as a regular incident. Someone just decided to take his profit, and he decided to leave the Bank to start a new life. It would help if you watched all these developments with great care.
Why Do You Need to Know The Reasons For Changing The Share Price?
To understand what is happening with the security, all shareholders need to understand the interrelationships of the causes that cause stock price movements. For example, if the Bank is doing well and quotes are declining for reasons that do not depend on the Bank itself, then the price of shares may go down. In such situations, you must buy the Bank’s share. But if the price declines for objective reasons (a prolonged industry crisis, an inefficient business model, a bad manager), then it is better to avoid such an action. You also need to understand what caused the stock’s growth. If the reasons for the development are speculative, it is better not to buy such securities. The bubble will burst and bury the investor under its soapy remnants. Therefore, the reasons for growth must be objective, not explained solely by investors’ hopes. Carefully analyse the reasons for the rise and fall of the stock price. This is important to understand when it is better to buy the share and when it is good to sell it.
What Happens When Shares of a Bank Go Down?
Now you understand why the prices of shares go up or decrease from time to time. When the costs of a bank share increase, all parties associated with it get lots of benefits. On the other hand, you may face tremendous losses if the charges of bank shares decrease due to any reason. Here are some negative consequences you encounter in such situations:
Decreased Reputation of The Bank
If the shares of a bank decrease continuously for a considerable period, its image in the common public starts to decline rapidly. Those who wish to open a bank account, deposit their sum in fixed deposits are more likely to do so in the coming days. Always keep in mind that dissatisfied customers spread rumours about the Bank, which tarnishes its image in the long run. It may affect the well-being of the Bank, and potential/existing customers may flee away.
No New Investment
If there is a perception about the particular Bank that it will collapse in the coming months, no investor would like to put his hard-earned money in its shares. This phenomenon is quite natural, and you shouldn’t get surprised about it. Nobody wants to deal with a struggling bank or financial organization. Investors have the feeling that if they invest in the share of struggling banks, they are not going to get the invested money and benefits. They fear losing invested capital, which keeps them aloof from making investments in such a bank.
Mass Exodus of Employees and Investors
When a bank doesn’t perform naturally, its employees and investors may flee one by one or in a group. Nobody wants to bear a loss because of a struggling Bank. Continuous decline of a Bank’s share displays its poor financial condition and damaged reputation in the market. Seeing the poor state of the Bank, its employees and investors sell their part of shares and flee away.
A Great Loss to Account Holders
If the management of a particular bank cannot stop the falling prices of its shares, a day comes when the bank collapse altogether. In such a situation, the Bank faces a massive shortage of liquidity. The failure of Lakshmi Vilas Bank (LVB) is a fine example of it. This Chennai-based 94-year-old private Bank was facing a shortage of asset liquidity for the past three years and shut down entirely in 2020. Lack of governance, poor management of daily business operations, ballooning NPA, and bad loans are behind the fall of this private sector bank. If you hold an active bank account with such a bank, you are likely to lose your money no matter whether it is saving or current. In case of the complete failure of Bank, the Deposit Insurance and Credit Guarantee Corporation Act, 1961′ (DICGC Act) allows you to get funds up to Rs 5 lakhs. So, prepare yourself for worse-case scenarios and never deposit too much money in a single bank account. If someday your Bank fails, you are financially ruined. Therefore, it is recommended that you must deposit amounts in small installments in 2-3 bank accounts. It will help meet essential financial obligations even if one Bank collapses due to any reason.
People deal with banks for a wide range of reasons. They maintain an account with a bank for daily banking needs, buying insurance policies, taking credit cards, etc. You may face negative consequences if a bank fails due to falling share prices. You need to be careful about this and see how your Bank performs in the market. Vigilance and keeping a close eye on the latest development regarding your Bank is the way to protect your interest & finances.