What is an Investment Bank (IB)
An investment bank (IB) is a financial intermediary that performs a variety of services. Investment banks specialize in large and complex financial transactions, such as underwriting, acting as an intermediary between a securities issuer and the investing public, facilitating mergers and other corporate reorganizations, and acting as a broker and/or financial advisor for institutional clients. Major investment banks include Barclays, BofA Merrill Lynch, Rothschild , Goldman Sachs, Deutsche Bank, JP Morgan, Morgan Stanley, UBS, Credit Suisse, Citibank and Lazard. Some investment banks specialize in particular industry sectors. Many investment banks also have retail operations that serve small, individual customers.
BREAKING DOWN Investment Bank (IB)
The advisory division of an investment bank (IB) is paid a fee for their services, while the trading division experiences profit or loss based on its market performance. Professionals who work for investment banks may have careers as financial advisors, traders or salespeople. An investment banking career can be very lucrative, but it typically comes with long hours and significant stress.
Because investment banks have external clients, but also trade their own accounts, a conflict of interest can occur if the advisory and trading divisions don’t maintain their independence (called the “Chinese Wall”). Investment banks’ 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 profit by matching buyers and sellers, especially for unique transactions. The largest investment banks have clients around the globe.
Investment Banks as Financial Intermediaries
Investment banks help corporations issue new shares of stock in an initial public offering or follow-on offering. They also help corporations obtain debt financing by finding investors for corporate bonds. The investment bank's role begins with pre-underwriting counseling and continues after the distribution of securities in the form of advice. The investment bank will also examine the company’s financial statements for accuracy and publish a prospectus that explains the offering to investors before the securities are made available for purchase.
Investment Banks as Financial Advisors
As a financial advisor to large institutional investors, the job of an investment bank is to act as a trusted partner that delivers strategic advice on a variety of financial matters. They accomplish this mission by combining a thorough understanding their clients' objectives, industry and global markets with strategic vision trained to spot and evaluate short- and long-term opportunities and challenges facing their client.
Mergers and Acquisitions
Handling mergers and acquisitions is a key element of an investment bank's work. The main contribution of an investment bank in a merger or acquisition is evaluating the worth of a possible acquisition and helping parties arrive at a fair price. An investment bank also assists in structuring and facilitating the acquisition in order to make the deal go as smoothly as possible.
The Research Division
The research divisions of investment banks review companies and author reports about their prospects, often with "buy", "hold" or "sell" ratings. While research may not generate revenue itself, the resulting knowledge is used to assist traders and sales. Investment bankers, meanwhile, receive publicity for their clients. Research also provides investment advice to outside clients in the hopes that these clients will take their advice and 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 on credit research, fixed income research, macroeconomic research, and quantitative analysis, all of which are used internally and externally to advise clients.