How do banks primarily make money from investments in securities?

• A. By earning interest and dividends from securities they hold
• B. By printing new money for their customers
• C. By charging customers a fee for every deposit
• D. By only holding cash reserves and not investing in any assets

Answer: (A)

Verified step by step guidance

1. Understand the role of banks in financial markets: Banks are financial intermediaries that manage funds and invest in various assets, including securities, to generate income.
2. Identify the types of income banks earn from securities: Banks primarily earn interest from debt securities (e.g., bonds) and dividends from equity securities (e.g., stocks) they hold.
3. Eliminate incorrect options: Banks do not print money for customers, as this is the role of central banks. Charging fees for deposits is not a primary income source related to securities, and holding only cash reserves without investing would not generate returns.
4. Focus on the correct mechanism: Banks invest in securities to earn returns, which is a key part of their profit-making strategy. This includes interest income from bonds and dividend income from stocks.
5. Conclude the reasoning: The correct answer is that banks primarily make money from investments in securities by earning interest and dividends from the securities they hold.