Investment Bank: What It Is, How It Works, Major Examples (2024)

What Is an Investment Bank?

An investment bank is a financial services company that acts as an intermediary in large and complex financial transactions. An investment bank is usually involved when a startup company prepares for its launch of an initial public offering (IPO) and when a corporation merges with a competitor. It also has a role as a broker or financial adviser for large institutional clients such as pension funds.

Global investment banks include JPMorgan Chase, Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, Credit Suisse, and Deutsche Bank. Many of these names also offer storefront community banking and have divisions that cater to the investment needs of high-net-worth individuals.

Investment Bank: What It Is, How It Works, Major Examples (1)

How an Investment Bank Works

The advisory division of an investment bank is paid a fee for its services. The trading division earns commissions based on its market performance. As noted, many also have retail banking divisions that make money by loaning money to consumers and businesses.

Professionals who work for investment banks may have careers as financial advisors, traders, or salespeople. An investment banking career is lucrative but typically comes with long hours and significant stress.

The Intermediary Role

Investment banks are best known for their work as intermediaries between a corporation and the financial markets. That is, they help corporations issue shares of stock in an IPO or an additional stock offering. They also arrange debt financing for corporations by finding large-scale investors for corporate bonds.

The investment bank's advisory role begins with pre-underwriting counseling and continues after the distribution of securities.

The investment bank is responsible for examining a company’s financial statements for accuracy and publishing a prospectus that describes the offering in detail to investors before the securities are available for purchase.

Investment bank clients include corporations, pension funds, other financial institutions, governments, and hedge funds.

Key Takeaways

  • Investment banks specialize in managing complex financial transactions such as IPOs and mergers for corporate clients.
  • Modern investment banking is typically a division of a bigger bank institution such as Citibank and JPMorgan Chase.
  • An ethical wall' is supposed to separate investment banking activities from the company's trading division to prevent conflicts of interest.

Size is an asset for investment banks. The more connections the bank has within the global financial community, the more likely it is to profit by matching buyers with sellers, especially for unique transactions. Investment bank operations can be roughly divided into three main functions.

Financial Advisors

As a financial advisor to large institutional investors, an investment bank may provide strategic advice on a variety of financial matters. They accomplish this mission by combining a thorough understanding of their clients' objectives, industry, and global markets with the strategic vision necessary to spot and evaluate short- and long-term opportunities and challenges.

Mergers and Acquisitions

Facilitating mergers and acquisitions is a key element of an investment bank's work. Some of the largest banks like Goldman SachsGroup Inc. (GS), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), and Citibank (C)will work with companies in any industry or sector. Smaller investment banks such as Greenhill & Co. (GHL) and Guggenheim Partners and might focus on a single sector, like healthcare.

The investment bank estimates the value of a potential acquisition and helps negotiate a fair price for it. It also assists in structuring and facilitating the acquisition to make the deal go as smoothly as possible.


Investment banks have research divisions that review companies and write reports about their prospects, often with buy, hold, or sell ratings. This research may not generate revenue directly but it assists its traders and sales department.

The research division also provides investment advice to outside clients who can complete a trade through the trading desk of the bank, which would generate revenue for the bank.

Research maintains an investment bank's institutional knowledge of credit research, fixed income research, macroeconomic research, and quantitative analysis, all of which are used internally and externally to advise clients.

Size is an asset in the investment banking business, where the biggest investment banks rely on a global network to match buyers and sellers.

Criticism of Investment Banks

Investment banks advise external clients in one division and trade their own accounts in another. That is a potential conflict of interest.

To prevent it, investment banks must maintain what is called an ethical wall between divisions. This figurative barrier is meant to prevent the sharing of information that would allow one side or the other to unfairly profit at the expense of its own clients.

Investment Bank: What It Is, How It Works, Major Examples (2024)


Investment Bank: What It Is, How It Works, Major Examples? ›

Investment banks are best known for their work as intermediaries between a corporation and the financial markets. That is, they help corporations issue shares of stock in an IPO or an additional stock offering. They also arrange debt financing for corporations by finding large-scale investors for corporate bonds.

What is investment banking and how does it work? ›

Investment banking is the division of financial services that works to raise money for individual investors, large corporations, and governments. Investment banks provide underwriting services to help clients raise capital and complete mergers and acquisitions (M&As).

What is an example of an investment bank? ›

A few notable investment banks include Morgan Stanley, JPMorgan Chase, Credit Suisse, Citigroup, Goldman Sachs, Deutsche Bank, and the Bank of America.

What is the major function of investment banking firms? ›

The primary goal of an investment bank is to advise businesses and governments on how to meet their financial challenges. Investment banks help their clients with financing, research, trading and sales, wealth management, asset management, IPOs, mergers, securitized products, hedging, and more.

What is investment banking simply? ›

Definition: Investment banking is a special segment of banking operation that helps individuals or organisations raise capital and provide financial consultancy services to them.

What is investment banking answer? ›

Q: What is investment banking? The investment bank performs two basic, critical functions: acting as an intermediary for capital raising, and as an advisor on M&A transactions and other major corporate actions.

What major is best for investment banking? ›

For those seeking a career in investment banking, a bachelor's degree in finance is a prerequisite. Other potential acceptable majors include bachelors in economics or bachelors in business supplemented with a minor in finance.

What is investment banking in one sentence? ›

What Is Investment Banking? Investment banking is a type of banking that organizes large, complex financial transactions such as mergers or initial public offering (IPO) underwriting.

How does investment work? ›

Investing is buying assets such as shares, unit trusts, or property with the expectation that your investment will make money for you. Investments usually achieve long-term goals. Investments can make your money work for you, and help you to create and preserve wealth.

What are the 4 areas of investment banking? ›

The four main areas of investment banking activity are Capital Markets, Advisory, Trading and Brokerage, and Asset Management.

How does an investment bank make money? ›

Investment banks earn revenue through fees charged for their services. Typically, there are two types of fees they earn: Underwriting fees for arranging the sale of securities (debt or equity) on behalf of clients. Advisory fees for providing strategic guidance.

What is the responsibility of investment banking? ›

Duties of Investment Bankers

At the crux of every investment banking role is raising money for clients. This is primarily done in two ways: issuing debt and selling equity in the company. Issuing debt means selling bonds to investors.

What is the job function of investment banking? ›

An Investment Banker, also known as a Banker or Personal Banker, helps individuals and companies raise capital by buying and selling stocks, bonds, and other securities. Their duties include building long-term relationships with investors to understand their financial goals.

How does the investment banking work? ›

An investment banker advises corporations, governments, or other entities on how to raise capital, as well as acquisitions, mergers, and sales of businesses. Investment banking is a type of banking involving organizing large financial transactions such as mergers or initial public offering (IPO) underwriting.

What is investment bank in simple words? ›

Investment banking is essentially a financial service provided by a finance company or a banking division to help large multinational corporations in their investment plans. Along with large companies and organisations, this service also helps high net worth individuals and governments to raise or create capital.

What is an investment bank for dummies? ›

Investment bankers help companies raise money by selling ownership stakes, or <em>equity,</em> in the company to outside investors. After the securities are sold by the investment bank, the owners are free to buy or sell them on the stock market.

How do investment bankers get paid? ›

Investment bankers make money through the fees charged to their clients. As discussed above, this includes underwriting fees for arranging the sale of securities and advisory fees for providing strategic guidance.

Is investment banking a good salary? ›

As of October 2023, according to Glassdoor, the average annual investment banking salary in the U.S. is $131,021.

Do you make a lot of money in investment banking? ›

Can you become a millionaire as an investment banker? It is possible to become a millionaire as an investment banker, but it is not easy. Investment bankers typically earn salaries in the $200,000 to $700,000 range, with bonuses that can bring their total income up to several million dollars per year.

What do investment bankers do day to day? ›

Investment bankers meet with clients, send emails, prepare offers, conduct financial projections, work on signing new clients to the company, providing initial public offerings (IPOs), and mergers and acquisitions. These are some of the tasks an investment banker must do on a daily or weekly basis.


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