What Is an Investment Bank - IB

An investment bank (IB) 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 a securities issuer and the investing public, facilitating mergers and other corporate reorganizations, and acting as a broker or financial advisor 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 industry sectors. Many investment banks also have retail operations that serve small, individual customers.

1:16

Investment Bank

How an Investment Bank - IB Works 

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.

Investment banks are most known for their work as financial intermediaries. That is, they help corporations issue new shares of stock in an initial public offering (IPO) 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’ 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.

[Important: Size is an asset in the investment banking business, where bigger banks have a greater opportunity to profit by matching buyers and sellers].

Types of an Investment Bank - IB

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 of 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.

Key Takeaways:

  • Investment banks specialize in complex financial transactions, such as underwriting, IPOs, facilitating mergers and other corporate reorganizations, and acting as a broker or financial advisor.
  • Size is an asset for investment banks, where the more connections the bank has the more likely it is to profit.
  • Because investment banks have external clients, but also trade their own accounts, a conflict of interest can occur.

Criticism of an Investment Bank - IB

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. Thus, most investment banks must maintain what's 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 unfairly profit.

[Fast Fact: JPMorgan Chase was the global leader in investment banking revenue for 2018 with $6.9 billion, with 8.1% of the market share—per the Wall Street Journal].