Investment banking is a key tool in the financial world because of the role it plays in raising capital and brokering deals for corporations and other companies. Investment banks tend to be very large, international operations these days, but they got their start in the U.S. by selling government bonds used to fund the Civil War. By the turn of the century, companies like J.P. Morgan and Goldman Sachs had become giants in the industry.
What Is Investment Banking?
Nowadays, investment banking as evolved to include a wide range of products that investors can choose from as well as different places to invest at such as corporations, institutions and government entities. The banks themselves are generally part of a larger entity that handles a large number of other tasks. Here are some key functions:
- Raising capital
- Financing large projects
- Advising clients
- Issuing bonds
- Managing assets
- Determining IPO prices
- Facilitating mergers and acquisitions
- Buying and selling securities
What Does Investment Banking Entail?
Since most investment banks are part of larger entities and banks, there is a high chance that you have heard of them or have done business with them before. Some of these entities include Goldman Sachs, Morgan Stanley and Deutsche Bank. Here are some of the other leading banks in this field:
- J.P. Morgan
There are two main types of investment banking: the buy side and the sell side. Here’s how their work compares:
- Buy-side investment banking involves buying and creating securities such as stocks, bonds, mutual funds and derivatives. Professionals on this side manage clients’ money, work to grow assets under management, and decide when to buy, hold or sell securities.
- Sell-side investment banking takes the above securities and products to the market. Professionals on this side conduct research, advise clients on transactions, help raise capital, make M&A recommendations, close deals, manage client relations and try to generate new business.
How Do Investment Banks Work?
A lot of their work happens behind the scenes through the process of brokering business deals, selling securities and promoting business growth. They work that these banks do have a significant effect on the markets and the broader economy.
As investment banks match sellers and investors, they inject liquidity into the markets. They also help companies as they prepare to go public, which creates investment opportunities and puts even more money into the markets.
Differences Between Investment and Traditional Banks
Banking falls into two different categories that consist of traditional and investment. Most people only know about traditional banks because those are the banks that they do all their banking form, get their mortgages from, and more. Here is a small summary of the differences between investment banks and traditional banks:
|FEATURE||INVESTMENT BANK||TRADITIONAL BANK|
|Products||Equity and debt securities||Deposit accounts
Set IPO prices
Provide financial advice
|Regulatory authorities||U.S. Securities and Exchange Commission||Comptroller of the Currency
Federal Deposit Insurance Corporation
Federal Reserve System
One of the biggest differences between traditional banks and investment banks is that investment banks don’t accept deposits, and traditional banks do. You also will not be able to visit a physical investment bank to do any of your investing. You will not see a government agency stop at a local branch and ask for a loan either. The two banking types have very different customers who have different needs.
- Mutual funds
- Index funds
- Hedge funds
- Pension funds
- Private equity
A commercial bank offers checking, savings, money market and other deposit accounts, as well as loans and credit cards. Some also provide wealth management services and financial advice.
Investment banks provide services such as issuing bonds, brokering deals, raising capital, setting prices for IPOs and facilitating mergers. Whereas, traditional banks can offer similar services, such as financial advising. They also process more basic bank transactions for their customers.
Another important distinction between investment and traditional banks is oversight. Investment banks are regulated by the SEC. This is because of the banks’ role in creating and promoting securities. Traditional banks are regulated by different agencies for different functions, including the FDIC, OCC and Federal Reserve.
Even if you don’t work for a business with an investment bank, understanding what they do and the services they offer will give you a better understanding of the industry. These banks are integral in providing important services to corporations and governemnts that do play a role in everyday life even it is only behind the scenes. For more posts like this, check out our list of bank guides.
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