Tuesday, 23 June 2015

Is it Safe to Trust Investment Banks?

After the 2008 sub-prime lending crisis in the US, Wall Street, which is the Mecca of investment banking, came crashing down. Many people lost their money, banks declared bankruptcy and it had a global effect. But the question is: Is it safe to put your money in an investment bank?

What does an investment bank do?

Investment banks are mainly comprised of three areas, the investment banking division (IBD), Sales and Trading (S&T) and Asset Management. Global banks provide all three services, while smaller institutions only offer advisory services. Investment banks raise financial capital for individuals, corporations and government agencies by acting as the client’s agent for the issuance of securities. Demat accounts are opened in the name of the individual and the bank invests on behalf of the customer through this account. Trading of mutual funds, equities, bonds, shares and debentures, apart from systematic investment plans, are the services offered by such institution. This is why they are called institutional investors.

Why invest through institutional investors?

Investment banking has gained popularity because of the experts sitting behind the desk handling investments. There is a huge risk in this form of banking, which is why it requires extensive market research before any investments are made. This is exactly what the financial institution does for you. You can never rely on one income source for life, therefore investing your money for future returns has become a necessity. Investment banks are especially helpful for start-ups, since they help raise capital. Most banks across the world provide investment banking as one their services. They might, however, charge certain fees and commission for the services provided to the customer.
Before investing or relying on any bank, one should always take certain safety measures. Always read the documents carefully and understand them. Be aware of your bank’s polices and terms and conditions. You can also ask friends and relatives for recommendations. It is also a good idea to read customer feedback on the banking website for more information. Never invest all your money in one sector and never rely for investment from one source alone. As they say, you should never put all your eggs in one basket.
Invest and trade in sectors where the valuation is on the rise. Never invest in a company whose valuation rose without any strategic change in company policy and services. There could be foul play at hand. Understand the risks and prepare yourself for the worst, since the financial markets and the economy are volatile at present.