I recently sold a bunch of stocks and parked the money in my savings account. I did this because the recent market rally this month made me a little nervous about the next short term market cycle, and also because I’m saving for a down-payment. I’ve had a savings account for almost 10 years now and it’s where I usually put my capital if I’m planning on a large investment or purchase in the near future.
But individuals like myself aren’t the only ones using banks to save. The large institutional investors who manage millions of dollars for their clients can also park their assets with banks, sometimes even in multiple countries to make the best of their money and act quickly upon opportunities internationally. A bank account can help with hedge funds, by mitigating their risk to the capital markets. Hedge funds are like mutual funds, except they can undertake a wider range of investments which usually make them more risky than mutual funds. There are many types of bank accounts, but most banks offer at least some version of a checking account, and savings account. Known for their liquidity and better interest rates than putting money under the bed, savings accounts give us somewhere safe to put our money that we don’t intend to use on a regular basis. And hedge funds use bank accounts to normalize the risk tolerance in their portfolios. For example if a hedge fund wanted to profit from the ups and downs of a certain stock, they can short the company at a high price, make money when the stock comes down, and then put some of the winnings in a bank account so it can earn some interest while they wait for another opportunity to short again.
You’ve probably heard that corporations around the world are sitting on over half a trillion dollars in cash because they are cautious about the economy and the future well being of their shareholders. Well investors are the same way. Individuals and hedge funds are sitting on loads of money because we’re nervous about the markets and waiting for something new to invest in, and banks can facilitate that service of paying us while we wait with virtually no risk.
Random Useless Fact: In the US, currently up to $250,000 in a savings account is insured by the Federal Deposit Insurance Corporation so even if the bank you’re with goes out of business, your money is guaranteed by the government. If you have more than that (if you happen to be so lucky,) you can open up multiple bank accounts to get around the limitation :0)