Editor’s note: This article was first published in April 2012. The 100,000-euro limit of Spain’s Deposit Guarantee Fund and the bank names mentioned, SelfBank and La Caixa, are as of 2012, and brands and rules may have changed since.
A reader asks us this question: “If I buy shares through a bank and the bank goes bust… would I lose my shares?” To many people the answer may seem obvious, but I’m sure plenty of others may not know these basics. Here’s our answer.
The bank is merely an intermediary in the buying and selling of shares. It’s a broker, an entity authorized to act as an intermediary, so if we buy 1,000 Telefónica shares through SelfBank or through La Caixa, we acquire those shares in our own name. The shares are ours, and we become shareholders in the company in question, in this case Telefónica. So what would happen if the bank went bust?
Nothing at all, because we would still hold our Telefónica shares. What’s more, if we buy shares through bank X and at some point want to stop working with that bank and move to bank Y, we can transfer our portfolio so that bank Y manages it, just as you can transfer a pension plan. It would be a different matter if Telefónica went bust, because then we really would lose our money, as our shares would be worthless. Learn about your rights as a shareholder in this article.
What we should worry about is the bank going bust when we’ve bought shares in the bank itself. If we buy 1,000 La Caixa shares, whether or not La Caixa is our intermediary (broker), and La Caixa goes bust, we lose our money.
In my personal opinion and view, stock market investing tends to be the most profitable investment, because once you know how it works, the risk can usually be kept under control (never 100%). In a previous article we talked about other investments that seem safe in theory but in practice have small print that turns them into risky investments.
For example, if we put money into a fixed-term deposit with a bank and the bank goes bust, the Deposit Guarantee Fund (Fondo de Garantía de Depósitos) ensures we get back up to €100,000.
On the other hand, if we invest in the bank’s promissory notes and the bank goes bust, that investment isn’t covered by any guarantee fund.
Then there are convertible bonds and subordinated debt, which are sold as safe investments, and some savers and investors aren’t told the truth: both products depend on the bank making a profit. In other words, they could stop paying us even if the bank doesn’t go bust, just as we could lose part of our money if the bank’s shares fall in value.
That’s why I always warn (even if it sounds repetitive) that when a bank sells its investment products, it doesn’t usually tell the whole truth, because that truth is written in a part of the contract that few people understand or stop to read.
Featured image: FouPic, CC BY 2.0, via Wikimedia Commons.
