Investment Bank

Investment Bank: What It Is, How It Works, Major Examples
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.1
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.
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.
 Investment banks maintain what is often known as an ethical wall to
separate investment banking activities from trading activities to prevent
conflicts of interest.
Investopedia / Sydney Burns
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
above, many also have retail banking divisions that make money by loaning money
to consumers and businesses.1
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.2
The Intermediary Role
Investment banks are best known for their work as intermediaries between
corporate clients and the financial markets. For example, they help corporations
issue shares of stock in an initial public offering (IPO) and additional stock
offerings. 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.
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 Advice
As a financial advisor to large institutional investors, an investment bank aims to

provide strategic advice on a variety of financial matters. The bank accomplishes
this mission by combining a thorough understanding of its clients' objectives,
industry, and global markets with its own strategic vision, a skill for spotting and
evaluating 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 Sachs Group Inc. ( GS), JPMorgan
Chase & Co. (JPM), Morgan Stanley (MS), and Citibank (C) work with companies in a
variety of industries and sectors. Smaller investment banks such as Greenhill & Co.
(GHL) and Guggenheim Partners and often 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.
Research
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 the bank’s traders and sales department.
The sales department typically oversees the buying and selling of financial
products such as stocks, bonds, commodities, and other securities.
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 often called an ethical wall
between divisions, as we mentioned earlier. 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.3
Retirement Security Rule: What It Is and What It Means for Investors
The new Retirement Security Rule, also known as the fiduciary rule, is intended to
protect investors from conflicts of interest when receiving investment advice that
the investor uses for retirement savings.4
The rule was issued by the U.S. Department of Labor (DOL) on Apr. 23, 2024. It
takes effect on Sept. 23, 2024. However, a one-year transition period will delay the
effective date of certain conditions to 2025.56
If an advisor is acting as a fiduciary under the Employee Retirement Income

Security Act (ERISA), they are subject to the higher standard—the fiduciary "best
advice" standard rather than the lower, merely "suitable advice" standard. The
designation can limit the products and services advisors are allowed to sell to
clients who are saving for retirement.

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

What Is an Investment Bank?

An investment bank is a financial services company that acts as an intermediary in

 Investment banks specialize in managing complex financial transactions

Investopedia / Sydney Burns

How an Investment Bank Works

The Intermediary Role

Investment bank clients include corporations, pension funds, other financial

As a financial advisor to large institutional investors, an investment bank aims to

Mergers and Acquisitions

Facilitating mergers and acquisitions is a key element of an investment bank's

Research maintains an investment bank's institutional knowledge of credit

Criticism of Investment Banks

Retirement Security Rule: What It Is and What It Means for Investors

If an advisor is acting as a fiduciary under the Employee Retirement Income

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