How Investment Banks Really Make Money: A Detailed Breakdown (2024)

The operations of investment banks can be very confusing and misunderstood to outsiders. In part, this is because the industry is rife with overly complex terminology and jargon.

However, in this article, I will describe in simple terms exactly how investment banks’ business models work and how they make money.

Let’s jump in!

The role of investment banks

First, let’s cover the basics.

Investment banks play a crucial role in raising capital for corporations and governments.

They help their clients on various financial matters such as mergers and acquisitions, initial public offerings (IPOs), debt issuances, and restructuring.

These are critical services for the functioning of businesses and the global economy.

Primary revenue streams of investment banks

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

They also often make performance-based bonuses based on the success of the deals they complete.

Below is a breakdown of each revenue stream for investment banks:

Debt underwriting

Business clients often need loans to expand, grow, or operate their business.

Investment banks help with this by providing “debt underwriting” services.

This means the bank will make a loan to the company, and later it will resell pieces that loan to other investors.

While they do not typically hold onto the loan ultimately, they are compensated for arranging and structuring the transaction.

Also, they are compensated for taking risk by holding the loan for the period after the deal closes and before the bank can resell the loan to others (usually earning 2% to 3% on each sale).

This is risky since the bank will incur a large loss if the debt’s value declines while it is held on balance sheet.

Equity underwritings (aka IPOs)

Investment banks also assist privately held businesses in becoming public.

This means they provide “equity underwriting.” In other words, they assume the risk by purchasing the shares themselves before they are resold to other equity investors on the public market.

Investment banks impose a high fee based on the amount of the offering (usually 2-8% of the total deal). They earn millions of dollars in commissions as a result. They are also paid for setting an appropriate price and assembling a solid network of enthusiastic investors about the company’s long-term prospects.

Equity underwriting and IPO business tends to be dominated by a small number of large investment banks, who receive most of the underwriting profits.

M&A advisory fees

Many businesses grow by acquiring other businesses. This is called a “merger” or an “acquisition.”

Businesses frequently consult investment bankers on these transactions, because they are very high stakes and usually quite expensive. It never hurts to have a second set of eyes on a big decision!

Investment banks have whole teams devoted to the consulting on such transactions (called the “M&A group”).

They offer clients advice on the right price to pay, how best to approach the target, how to conduct finance analysis, etc.

Investment banks sometimes demand a hefty consultation fee, which fluctuates depending on how many hours of work the investment banker has to put in since the advice is given by some of the most experienced investment bankers.

In contrast to other revenue sources, this doesn’t involve the bank taking on any risk or making a commitment to their balance sheet; instead, they only offer to advise and are compensated handsomely (e.g., 1-2% of deal value). Although there may occasionally be a retainer element, this is mostly a success fee.

Banks can also get “debt underwriting” business by advising on M&A deals, if the transaction requires additional financing.

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Interest income from lending

Above I described how investment banks make money by underwriting and arranging debt deals.

Well, banks also make some money (though a small amount) by holding onto a small percentage of the debt they issue for clients. When they hold onto debt, they earn interest on the debt as it is paid by the borrower.

Typically, the debt held by investment banks falls into two buckets:

  • Revolving” credit facility – think of it like a “credit card for companies”. It allows companies to access cash on demand if it is needed. Banks not only earn interest on the borrowings, but they also charge fees for any unused amount as well
  • “Hung” underwritten debt deals – Whatever piece of an underwritten debt contract they cannot sell on favorable terms is kept on the balance sheet, and the bank will get interest revenue from it.

Trading & market-making

Many investment banks have sizable sales and trading departments in charge of purchasing, briefly holding, and then selling stocks and bonds to provide liquidity to clients.

Investment banks frequently operate market-making activities to generate money by facilitating liquidity in the stock market or other marketplaces.

A market maker displays a quote (purchase price and sell price) and receives a modest commission, known as the bid-ask spread from the difference between the two prices.

In most markets, these commissions have gotten smaller and smaller over the years as markets have gone electronic and information asymmetries have disappeared.


Investment banks also make money by packaging and reselling shares in assets (called “securitization”).

For instance, banks might purchase a pool of assets (say a group of corporate loans) pools from commercial banks.

They take these loans and create a new security from the whole with different tranches to make the securities more appealing to various investors. In this business, banks will typically make a small underwriting fee as a percentage of each deal.

Proprietary Trading

Sometimes investment banks invest their own money in the financial markets through proprietary trading.

In trading, the bank makes money on the performance of the trades.

Since new laws were enacted in the wake of the 2007–2008 financial crisis, proprietary trading has become significantly less common.

Asset management

Strictly speaking, asset management fees are OUTSIDE of the investment bank, but many large investment banks (e.g. JP Morgan, Goldman Sachs) have asset management arms, so I’m including it here.

Typically, asset management fees are earned by advising large clients on how to invest their money. Traditionally, the fees earned by banks are calculated as a percentage of the amount of money invested.

How investment bankers make money

Above we’ve covered how investment banks make money.

However, we should also clarify how investment BANKERS make money.

Overall, investment banking is a lucrative field that requires a deep understanding of finance, strong analytical skills, and excellent interpersonal abilities. “Why investment banking” is not a hard question for many for this reason.

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.

Investment bankers also can earn performance-based bonuses, based on the actual success or quality of the transaction they completed.

Investment bankers compensation typically has the following components:

  • Salary
  • Cash bonus
  • Equity bonus

Next steps

Read the rest of the investment banking primer to know more about investment banking.

How Investment Banks Really Make Money: A Detailed Breakdown (2024)


How Investment Banks Really Make Money: A Detailed Breakdown? ›

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.

How does investment banking make money? ›

Investment banks often have market making operations that are designed to generate revenue from providing liquidity in stocks or other markets. A market maker shows a quote (buy price and sale price) and earns a small difference between the two prices, also known as the bid-ask spread.

Do investment bankers actually make a lot of money? ›

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.

How do banks make money in detail? ›

They earn fees for customer services, such as checking accounts, financial counseling, loan servicing and the sales of other financial products (e.g., insurance and mutual funds).

How are investment banks broken down? ›

Investment Banking Companies

Investment banks are frequently divided by size, status, region, and industry focus. Three common categories include bulge bracket (BB) banks, middle market (MM) banks, and boutique investment banks, which we cover in our article on the top investment banks.

What is investment banking in a nutshell? ›

Summary. Investment banks play a key role in helping companies and government entities obtain capital financing. As financial advisors to their clients, they help to price capital, allocate resources, and manage investments.

What do investment banks do for dummies? ›

They take in deposits from consumers and businesses, and then lend out the money to companies or consumers. But the duties of investment banks are quite different. Instead of taking deposits, investment banks sell securities.

How do banks get so rich? ›

Commercial banks make money by providing and earning interest from loans [...]. Customer deposits provide banks with the capital to make these loans. Traditionally, money earned in the form of interest from loans often accounts for up to 65% of a banks' revenue model.

What type of investments do banks use to make a profit? ›

Since banks often provide wealth management services for their customers, they are able to profit off of the fees for services provided, as well as fees for certain investment products such as mutual funds.

What stops banks from creating money? ›

Required reserves are to give the Federal Reserve control over the amount of lending or deposits that banks can create. In other words, required reserves help the Fed control credit and money creation. Banks cannot loan beyond their excess reserves.

How do investment banks win business? ›

After the Pitch

For smaller companies and deals, the fees make a bigger difference and sometimes a bank will win the deal by promising lower fees or a structure that rewards them for better results (e.g. 0.75% under $500 million and 1.5% for the amount above $500 million).

What makes investment banks stand out? ›

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.

How does Goldman Sachs make money? ›

Goldman Sachs engages in a variety of market-making, proprietary trading and arbitrage activities in equity securities and equity-related products (such as convertible securities and equity derivative instruments) on a global basis.

Why is investment banking so profitable? ›

But what exactly drives the stratospheric earnings of investment bankers? At the heart of an investment banker's earning potential lies their involvement in high-value deals and transactions. These professionals facilitate mergers, acquisitions, and IPOs for corporations, reaping substantial fees in the process.

How does JP Morgan make money? ›

JPMorgan provides financial services to consumers, small businesses, large corporations, governments, and other clients. The company's Consumer & Community Banking segment is the largest source of revenue.

How do banks make money from investment accounts? ›

Since banks often provide wealth management services for their customers, they are able to profit off of the fees for services provided, as well as fees for certain investment products such as mutual funds.

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