What Is Investment Banking?

Budgets & Banking, Investing Basics, Planning & Saving, Retirement & Investing, Small Business
on April 14, 2012

An investment bank is a specific kind of financial institution that enables individuals, businesses and public bodies in raising capital through the sale of securities. Investment bankers normally work with large organizations and high net worth individuals, and, unlike retail banks, investment banks do not take deposits. New products are constantly in development, in an effort to attract new customers, ensuring that investment banking remains a buoyant and fast-changing market.

Activities undertaken. Investment bankers undertake a number of different activities. They provide financial advice to clients, offering recommendations on the best ways to make a return on any financial investments. They offer brokerage services to investors, whereby they will purchase or sell securities. They will also underwrite and distribute new financial products or securities as they become available to the market.

What are securities? A security is a financial commodity or instrument with a measurable financial value. There are three different categories of security. Debt securities include bank notes, bonds or debentures (documents creating or acknowledging debt), as well as equity securities (normally stocks and shares). Derivatives (essentially financial contracts between two parties) are also categorized as securities.

The U.S. investment banking industry. The U.S. investment banking industry is the largest in the world. As of 2011, the four biggest investment banks in the world were all U.S.-based. JP Morgan, Bank of America Merrill Lynch, Morgan Stanley and Goldman Sachs generated more than $15 billion in fees.

The United States versus other countries. Historically, banks traded as either commercial or investment enterprises. In the United States, that changed in 1999 when the Gramm-Leach-Bliley Act allowed banks to consolidate their operations. This differs from other parts of the world, notably Europe, where the industry remains more heavily regulated.

Why use an investment bank? Investment bankers are experts in the industry and can offer valuable, highly specialized advice. An investment banker's expertise in the market can enable investors to see significant returns, with confidential and impartial advice. Investment bankers normally have a highly developed network of contacts, through which they can locate buyers and sellers in a way that individuals or organizations would not be able to manage.

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