The term "authorized investment" has different meanings in different parts of the world and it can also mean different things depending on the context in which it is used. There are laws in many countries that only enable banks and other financial firms to invest client funds in certain types of authorized investment vehicles. In other instances, an investment is authorized if the owner of the funds actually sanctions the investment.
Banks generate income by investing funds from deposit accounts in various types of securities. Some securities, such as stocks, expose investors to higher levels of principal risk than other types of securities such as government bonds. In theory, bank customers could lose all of their money if banking institutions invested client funds in speculative high-risk types of securities. Consequently, laws exist in many nations that require banks to invest deposited funds into certain types of low-risk securities. In these instances, banking regulators have to ensure that banks only use deposited funds to purchase securities that appear on the national or regional government's authorized investment list.
Aside from banks, certain other entities such as trust funds are given fiduciary powers to legally manage sums of money that will eventually pass to other individuals or entities. To prevent trust managers from taking unnecessary risks with client's funds, trust agreements often include a list of authorized investment options. The beneficiaries of a trust may be able to start civil or even criminal proceedings against a trust manager who invests trust funds in unauthorized investment vehicles.
Investment brokers are licensed securities traders who buy and sell stocks, bonds and other securities on behalf of clients. Generally, traders can only buy and sell securities when instructed to do so by their clients. Nevertheless, in some countries clients can assign fiduciary responsibilities to brokers, in which case brokers can make trades without the client's consent. Where such fiduciary powers are to be used, brokers normally have to get a written statement from the client that stipulates the kinds of securities that the broker may purchase on behalf of the client. Unauthorized investments are trades involving the acquisition of any securities that are not on the client's list.
Employees of businesses and governmental organizations are often allowed to make budgetary decisions and to spend funds on behalf of their employer. Nevertheless, most employers impose general guidelines that limit the manner in which employees can invest funds. A transportation firm manager may have the authority to buy a truck on behalf of the firm because the truck is regarded as an authorized investment that will help the firm to generate revenue. Conversely, a trucking company manager may not have the authority to invest company funds in securities or other types of investments. Therefore, authorized investments involve someone making an investment decision that neither violates local laws nor company policies.