About Financial Investment Companies
Financial investment companies are in the business of allocating capital productively. They employ analysts, traders, business experts and many others. Many such companies help to broker mergers, acquisitions divestiture and other such complex major corporate transactions. Most important, they manage the money of major institutional clients, trading securities of all kinds for significant profits.
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Identification
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Financial investment companies are commonly referred to as investment banks, although the services they provide are significantly different from those offered by consumer banks. They are regulated by the Securities and Exchange Commission, and exclusively manage the accounts of major corporate clients and high net worth individuals. The theoretical advantages behind going to a financial investment company to manage money is that they have the size and expertise to maximize returns relative to the market at large.
Features
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One of the salient aspects of a financial investment company relative to smaller operations is their massive access to leverage, a term that used to mean credit that is in turn used in an investment. These companies are able to use leverage to turn small profits into massive ones. In theory, the extra risks involved in using large amounts of leverage are offset by the company's significant capital reserves and their unusually good access to expert information.
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Function
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Financial investment companies act as powerful market movers. When they execute trades, it's generally in a size large enough to have significant effects on the prices of the securities involved. As such, companies of this scale need to utilize unusual trading strategies to mitigate the effects of their purchases, aggressively hedging investments in order to minimize risk and maximize return. The ability of financial investment companies to operate specialized facilities that focus on various aspects of the market--bonds, currencies, equities and so on--increases their ability to bring in profits.
Theories/Speculation
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Despite the decades of impressive success of American financial investment companies, their reputation has lost a great deal of its former luster in the light of major failures of companies such as Lehman Brothers and Bear Sterns. These two cases are excellent examples of what happens when leverage and financial experimentation goes awry. Both institutions invested too much in risky assets--securitized sub-prime mortgages--using borrowed money, and ended up entering insolvency in what seemed to be the blink of an eye.
Potential
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The future of global financial investment companies is still up in the air, with the regulatory environment altering as quickly as the news cycle can keep up with it. It's almost certain, however, that the fundamental structure of these multinational corporations will remain similar. They will continue to perform their historic role as capital allocation specialists for the wealthiest companies and people in the world. The structural advantages provided by both large scale and conglomeration of expertise remain, even if high-profile failures have shaken public confidence.
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Resources
- Photo Credit David Paul Ohmer, Flickr
