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)


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 the definition of an investment bank with example? ›

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.

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 major? ›

Common majors are finance, business, economics, and accounting. You also need to pass licensing exams to work as an investment banker.

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.

Why investment banking examples? ›

Some generic themes to draw on for your answer to “Why Investment Banking” could include:
  • Fast-paced environment.
  • Exposure to high profile transactions.
  • Surround myself with intelligent and motivated people.
  • Valuation & financial modeling work.
  • Steep learning curve.
  • Passion & love for finance.

What is an example of an investment banker? ›

Investment bankers often work as part of a financial institution. Examples of investment banker employers are Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan Chase (JPM), Bank of America Merrill Lynch (BAC), and Deutsche Bank (DB).

What is investment banking simply? ›

Investment bankers are financial advisors to corporations and, in some cases, to governments. They help their clients raise money. That may mean issuing stock shares, floating a bond issue, negotiating the acquisition of a rival company, or arranging the sale of the company itself.

How does investment work? ›

Investing is the act of distributing resources into something to generate income or gain profits. The type of investment you choose might likely depend on what you seek to gain and how sensitive you are to risk. Assuming little risk generally yields lower returns, and assuming high risk typically yields higher returns.

How does an investment bank 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.

What falls under investment banking? ›

Full-service investment banks offer a wide range of services that include underwriting, M&A, sales and trading, equity research, asset management, commercial banking, and retail banking. The investment banking division of a bank provides only the underwriting and M&A advisory services.

How do banks invest their money? ›

Only a small portion of your deposits at a bank are actually held as cash. The rest of your money (the majority of the bank's assets) is invested by the bank into vehicles such as consumer or business loans, government bonds and credit cards. Borrowers have to pay the bank back with interest.

What is the definition of investment banking? ›

Definition: Investment banking is a special segment of banking operation that helps individuals or organisations raise capital and provide financial consultancy services to them. They act as intermediaries between security issuers and investors and help new firms to go public.

How hard is investment banking? ›

Investment banking is one of Wall Street's most coveted roles. It is also one of the hardest. It is no surprise that the average day in an investment banker's life is long and stressful. Those who manage to survive the adjustment period often go on to have long and financially rewarding careers.

What is a job in investment banking? ›

What Is an Investment Banker? Investment bankers are investment professionals who combine financial services industry expertise, analytical prowess, and effective persuasive communication skills to support institutional clients in activities like capital raising and mergers and acquisitions.

How do investment bankers make money? ›

Proprietary trading is an effort to make profits by trading the firm's own capital. Investment banks earn commissions and fees on underwriting new issues of securities via bond offerings or stock IPOs. Investment banks often serve as asset managers for their clients as well.

Is investment banking high paying? ›

Investment bankers are typically the highest-paid workers in the finance industry—high salaries are most prevalent even among younger employees. The starting salary for the typical investment banker exceeds that of most other finance positions, but working in this field has its challenges.

What do investment bankers do day to day? ›

Key Takeaways. Investment bankers meet with clients, prepare offers, run financial projections, and work on pitchbooks, that help generate new clients. The work is lucrative but the days are long and stressful.

Is investment banking hard? ›

Investment bankers are notorious for working long and demanding hours, with work weeks well exceeding 40 hours being the norm for entry-level investment banking analysts. In a competitive culture where putting in extra-long hours is regarded as a badge of honor, a 9-to-5 routine is pretty much unheard of.

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