Can Banks Invest Money in Stock?

Most investors keep some money safely deposited in a bank, and they use other money to make investments. However, even the money you deposit into your bank account might end up going toward stock. Even if your bank invests in stock, you don't directly take on any of the risk associated with that investment.

Bank Income

Banks are businesses, and to be profitable they earn income from a variety of sources. Most of a bank's income generally comes from the interest it charges on loans to customers. Additional bank income comes from the fees it charges, and from the income on investments it makes. Investment income can come from stock holdings, both as gains on stock sales and from dividends that the issuers of the stock pay to the bank.

Regulations

Banks differ from other financial institutions in part because of strict regulations that control their activities. Although these regulations don't forbid banks from investing in stock, they do limit how much banks can invest. The purpose of these regulations is to ensure that banks don't risk -- and lose -- too much in the stock market, which could hurt their ability to remain in business and repay depositors.

Risk

Federal banking regulations limit how much banks can invest in stock, how much cash they must keep on hand to cover customer withdrawals, and even how much risk they can take on with their investments. As a result, banks usually avoid stocks that are high-risk or highly volatile. Instead banks use stocks to round out, or diversify, their sources of income.

Mutual Funds

Mutual funds are a different case of banks investing in stock. If a bank offers a mutual fund as an investment product, it takes money from investors and uses it to buy stocks, bonds, and other securities. The securities are pooled together, and a fund manager employed by the bank decides when to sell and buy securities. Although the bank is investing in stock, it is doing so only with money from investors who understand the risks. Losses in its mutual fund don't directly affect the bank's bottom line.

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