What is an Investment Bank?
If you have seen the movie “The Big Short” or “Too Big To Fail” or read about the infamous financial crisis of 2008, you probably have some idea about what an Investment Bank is.
An Investment Bank is a large financial institution which helps the government or private corporations that require funds. It acts as an intermediary between entities that have money to invest (investors) and entities that need funds to grow their business (corporation).
How is it different from traditional banks?
A traditional bank has interest spread (difference between interest received and paid by it) as its major source of income. An investment bank, on the other hand, can perform various services like underwriting, Mergers & Acquisitions (M&A), sales & trading, etc. and receive fee / commission in exchange.
How does an Investment Bank works?
An Investment Bank, usually, provides services like,
i. Underwriting services, where the investment bank takes up a task to sell all or some portion of the shares to be issued in an Initial Public Offering (IPO)
ii. M&A advisory services, where it manages the M&A process from start to finish. This is the service that investment banks are most known for.
While a full service Investment Bank offers variety of services (including the above mentioned services) like,
i. Sales & trading, where the investment bank can act as an agent to clients or invest its own capital to trade in stocks and bonds. Since, most of investment banks are involved in dealing for both internal and external clients, they must maintain a Chinese wall (An information barrier between these two divisions to prevent either side to profit in an unfair manner)
ii. Equity research, where the investment bank publishes research reports on various stocks to help investor to make a trade decision on a stock.
iii. Asset management, where the investment bank manages investments of the investors.
Buy Side v/s Sell Side
When an Investment Bank works with an entity who wants to raise capital, it works on the Sell Side as the entity wishes to “Sell” its shares/bonds to the incoming investor.
On the other hand, when the Investment Bank works with the investor who wants to Invest in / “Buy” the shares/bonds of a company, it works on the Buy Side.
Major Investment Banks
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