How Investment Firms Work

Features

Investment firms are designed to make money by taking a set amount of funds and using them to invest in profitable assets and businesses. Although large investment firms may have thousands of employees, they are generally directed by one or at most several top executives who direct the firm's use of its funds. While some investment firms are publicly-traded, others are privately-owned and invest the money of only a small group of investors.

Types

Investment firms come in a variety of forms. One of the most common types of investment firms are investment banks. Investment banks are often publicly-traded, meaning that they have issued shares of stock that are owned my many different investors. Smaller investment firms, such as venture capital firms, which invest in new companies, and hedge funds, which invest in a variety of assets, are far more exclusive.

Investment Strategies

The investment strategies used by investment firms differ depending on the investment firm's focus. Some firms may specialize in a particular asset class or type of business. For example, a venture capital firm may specialize in technology companies. Other firms, however, particularly hedge funds, may be prepared to invest in any kind of business or asset that it deems potentially profitable. This allows these companies flexibility to move their money as the market changes.

Risks

Investment firms are subject to economic downturns, particularly those that affect the economy as a whole. Many investment firms have only paper assets, such as securities. If the stock market suffers a collapse, the firms may stand to lose an enormous amount of money. To guard against this, some investment firms hedge their bets by shorting assets -- meaning that they place bets that the assets will decline in value.