WHAT IS AN INVESTMENT BANK?
An investment bank is a financial intermediary that performs a variety of services. Most investment banks specialize in large and complex financial transactions, such as underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and acting as a financial advisor or broker for institutional clients.
Major investment banks include JPMorgan Chase, Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, Credit Suisse, and Deutsche Bank. Some investment banks specialize in particular industrial sectors. Many investment banks also have retail operations that serve small, individual clients.
HOW AN INVESTMENT BANK WORKS
The advisory division of an investment bank receives a fee for its services, while the commercial division experiences gains or losses based on its performance in the market. Professionals who work for investment banks may have careers as financial advisers, traders, or salespeople. A career in investment banking can be very lucrative, but it usually involves long hours and significant stress.
Investment banks are best known for their work as financial intermediaries. That is, they help corporations issue new shares in an initial public offering (IPO) or continuation offering. They also help corporations obtain debt financing by finding investors for corporate bonds.
The role of the investment bank begins with pre-subscription advice and continues after the distribution of securities in the form of advice. The investment bank will also examine the accuracy of the company’s financial statements and publish a prospectus explaining the offering to investors before the securities are available for purchase.
Investment bank clients include corporations, pension funds, other financial institutions, governments, and hedge funds . Size is an asset for investment banks. The more connections the bank has within the market, the more likely it is to make a profit by matching buyers and sellers, especially for one-time transactions. The largest investment banks have clients all over the world.
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KEY IDEAS
Investment banks specialize in complex financial transactions, such as underwriting, IPOs, facilitating mergers and other corporate reorganizations, and acting as financial brokers or advisers.
Size is an asset for investment banks, where the more connections the bank has, the more likely it is to make a profit.
Because investment banks have external clients, but also trade their own accounts, a conflict of interest can occur in their operations.
TYPES OF INVESTMENT BANK ACTIVITIES
FINANCIAL ADVISORS
As a financial advisor to large institutional investors, an investment bank’s job is to act as a trusted partner providing strategic advice on a variety of financial matters. They fulfill this mission by combining a deep understanding of the objectives of their clients, the industry and global markets with a strategic vision capable of detecting and evaluating the opportunities and challenges that their clients face in the short and long term.
FUSIONS AND ACQUISITIONS
Managing mergers and acquisitions is a key element of an investment bank’s job. The main contribution of an investment bank in a merger or acquisition is to assess the value of a potential acquisition and to help the parties come to a fair price. An investment bank also helps structure and facilitate the acquisition so that the deal runs as smoothly as possible.
INVESTIGATION
Investment banks’ research divisions review companies and write reports on their prospects, often with “buy,” “hold,” or “sell” ratings. While the research may not generate income by itself, the resulting knowledge is used to help merchants and sales status. Investment bankers, meanwhile, receive publicity for their clients. The research also provides investment advice to external clients in the hope that these clients will follow its advice and complete a trade through the bank’s trading desk, which would generate income for the bank. Research maintains an investment bank’s institutional knowledge in credit research, fixed income research, macroeconomic research, and quantitative analysis, all of which are used internally and externally to advise clients.
CRITICISM OF INVESTMENT BANKS
Because investment banks have external clients, but also trade on their own accounts, a conflict of interest can occur if the advisory and trading divisions do not maintain their independence. Therefore, most investment banks must maintain what is called a Chinese wall . The wall is a figurative barrier between the two investment banking departments to help prevent the sharing of information that would allow one side or the other to make unfair profits.
