What Exactly is Investment Banking?
Oft misunderstood, investment banks, like Goldman Sachs, have been mixed up with both commercial and retail banks many times, leading to much confusion and bewilderment. Neither a retail bank nor a commercial bank, investment banks do not accept deposits from individuals or businesses. In fact, investment banks do not accept deposits at all. Instead, investments banks raise money by selling securities to investors – typically bonds and shares – who tend to be either firms or high net-worth individuals (HNWI).
With a clientele that includes sophisticated firms, investment banks usually deal with complex funding needs as compared to those of commercial banks, and, as such, sales of securities typically go into entrepreneurs, companies and even government entities who need large amounts of cash upfront for a number of reasons, such as company expansion or to fund research and development.
In other words, banks in this area usually function as intermediaries in between those with ideas that need funding to bring it to fruition and wealthy individuals and companies, using money to drive production and purpose – and even affects society as well as daily life.
Investment banks generally offer a wide range of services, though these services may vary from one bank to another. For example, while a main activity usually involves raising funds through investors to help clients, a bank’s good commercial and market awareness means that objective financial advice can also be provided, such as on mergers and acquisitions. On the other hand, others may offer asset management services. Other services include brokerage, conducting research on securities to support investors and developing securities.
Additionally, some investment banks – such as Barclays – are even part of commercial and retail banks.
As banks often act as a middleman between investors and clients, another service they provide is debt financing, where the bank makes a bond or loan with a client that is to be paid back with interest. But before that, the bank would assess the client and consider the client’s credit history, how much finances it needs and for what purpose, as well as the global market to figure out how many investors would be interested.
Equity financing is a service investment banks also provide, where, instead of loaning clients a lump sum, find investors willing to become a company’ shareholders by investing directly. In this case, the bank’s client will be able to secure finances without needing to pay the bank back.
Direct contact with an investment bank may be unlikely, especially when compared to insurance companies as well as commercial and retail banking. However, investment banks do affect daily life in that they work with many different entities around the world, helping with their mergers, acquisitions or expansions.
As their range of clients include companies and government entities, investment banks have an indirect hand in our lives from clothes to transport, offering good advice and enabling growth.
With additional credit to Antonia Riera for her contributions to the article.