The term “approved list” is used in two different ways in the financial world. In both senses, the term references a list of securities which are considered fit for purchase. The list may be prepared by financial experts or government officials, depending on the people or organizations the list is being prepared for, and it may be prepared in accordance with a variety of different standards.
In the first sense, an approved list is a list of investments which fiduciaries are legally allowed to purchase. Fiduciaries are people or organizations who are empowered to make financial decisions on behalf of others. Because they are buying for people other than themselves, they are held to a very high standard of financial behavior; people and institutions trust their fiduciaries to make sound choices, and thus fiduciaries are closely regulated to ensure that they behave appropriately.
The approved list in this case consists of a list of high quality securities, as assembled by government agencies. These agencies consider issues such as investment ratings, past performance on similar investments, and so forth to determine whether or not a given investment is of high enough quality to be placed on the approved list. Fiduciaries must select investments from this list, and must remain aware that the list can be updated over time in response to changing conditions. An individual investment on the list is called a legal investment, and the list may be known as a legal list.
In the second sense, an approved list is a list of securities which members of a brokerage firm are allowed to buy. The idea is to limit risk while still allowing people to assemble their own portfolios. The list is generally kept large and diverse to allow for flexibility when developing portfolios, and it is regularly updated to take advantage of market trends and to remove investments which are no longer deemed safe.
For people with limited experience, having a limited selection of safe securities to pick from can be beneficial, because it allows them to explore investing without putting themselves at high risk. On the other hand, an approved list can be extremely limiting for more savvy investors or investors with specialized needs which cannot be met from the list alone. Thus, people need to consider potential limitations before opening a brokerage account to ensure that they work with the firm most suited for the type of investment they plan to be involved in.