Introduction Investment banking is that branch of banking that provides an array of financial services relating to raising capital for institutions by providing underwritings and other advisory services. They act as an intermediary and facilitate financial transactions between the buy-side (the investors) and the sell-side (the corporations).

Some of the top investment banks in the world are:

• JP Morgan Chase
• Goldman Sachs
• Morgan Stanley
• Bank of America Merrill Lynch
• Barclays

The majority of these banks are a part of the bulge bracket (upper tier).

The Working of an Investment Bank

An investment bank is termed often as the “sell-side”; they play key roles in the functioning of the corporate markets. They connect institutions with capital to corporations that might need funds to make their business grow. They facilitate large complex transactions like IPOs and also provide M&A-related (Mergers and Acquisitions) services.

The organizational structure of IBs can be categorized into front-office, middle-office, and back-office jobs.

• Front office: This consists of the financial advisory and also the markets related to business. They majorly contribute to revenue as well.

• Middle office: Treasury management, keeping a pulse on the liquidity risk and tracking and analyzing capital flow fall under the purview of the middle office.

• Back office: The back office handles the logistics of the trades. It checks them and then does the required transfers of the trade, making it an integral part of the organizational structure.

Role and Purpose of Investment Banks

The separation of the banking world into two entities - commercial banking and investment banking has been a controversial and hot topic for discussion since the Global Financial Crisis of 2008. 

Commercial banks provide basic services like personal loans, loans for small businesses, savings accounts and current accounts (Commercial Banks: Types and Functions).

On the other hand, investment banks facilitate capital raising by underwriting, expediting and aiding the process for an IPO, taking advisory roles during mergers and acquisitions and broker trades. 

Let’s take a closer look at each function:

Raising Capital Security and Underwriting

When organizations want to raise capital, for reasons like expansion, acquisition or even clearing debt, they can do so through debt (bonds) or equity (stocks). The investment acts as a bridge and connects the people who would wish to buy stocks or bonds and the corporations who want to issue them. Investment banks underwrite stocks or bonds and then they sell them to investors on behalf of the issuing company. It is the job of the investment bankers to analyze the risk and profile of the company after which they negotiate a price at which they agree to sell the stock often by making a market (like an Initial Public Offering). 

Mergers and Acquisitions Advisory

Mergers and acquisitions are a great way to grow one’s company. Investment banks help with just that, if they assume the role of an advisor for a company that wants to sell, then it is a sell-side arrangement and when it’s for a company that wants to buy, then it is a buy-side arrangement. Investment banks are experts when it comes to business valuations, negotiating “fair” deals, due diligence and working out the details, mode and how these transactions will be carried out. Other services also include takeover strategy, hostile takeover defenses and more.

Sales and Trading and Equity Research

Investment banks act as a broker/agent when they match up investors who wish to sell securities to buyers in the secondary market.

Investment Banking and the World

According to a study, investment bankers have been perceived as the fifth least trustworthy profession. Investment banking often means high-pay packages and long working hours and is often perceived as greedy. The investment banks have external clients and they also trade internally which might often give scope for conflicts of interest. Investment banks, to avoid such conflict of interests, often implement “Chinese walls” to stop information from moving between departments. Investment banks are highly competitive as they all want to be part of those multi-million dollar IPOs. The world of investment banking has faced a lot of criticism because of the opaque nature in which these banks operate.