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.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 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.
- A ‘Chinese 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.