Overview of Investment Banking

About Investment Banking

Investment banks are financial institutions that help wealthy corporations, individuals, and governments raise capital through underwriting or acting as the agent of the client in issuing securities. Investment banks also help companies in providing services to support market-making and different securities trades, as well as mergers and acquisitions. The chief investment banking services include equity research, banking investments, corporate finance, asset management, and sales & trading. Investment banking companies make money by providing these services for fees and commissions.

An investment in banking stock typically involves the stock purchase of one or more large investment banking firms, such as Goldman Sachs, J.P. Morgan, and Morgan Stanley. The U.S. is currently the main source of global investment banking income, accounting for about 53% of the total.

Early History

Investment banking has its origins in the Civil War era. During that war, the federal government needed money to fund the war effort, and banking houses were syndicated to that end. The first large-scale securities selling effort in the United States was launched by Jay Cooke. Cooke hired a massive force of thousands of salesmen to float hundreds of millions of government bonds to a diverse group of investors. Then, as a Treasury Department representative, he launched a war bond effort that added over one billion dollars to the Treasury.

Front Office

Corporate finance is the component of investment banking involving assisting customers in raising funds in capital markets and providing advice regarding mergers and acquisitions. Typical activities in this realm involve subscribing clients to a security issuance or negotiations with a merger target.

Sales/Trading

The primary function of an investment bank is the buying and selling of products on behalf of the bank and its clients. The sales force of the bank is tasked with calling on institutional and wealthy investors to suggest trading strategies and the taking of orders. Sales then transmits the orders to the appropriate trading desks, which goes about executing the trades.

Research

Research is the part of the firm that reviews various companies, writing reports about them, sometimes with “buy” or “sell” ratings attached. Although the research department does not always generate income, the information it generates helps traders in trading profitably. It also helps give investment advice to outside clients, with the goal of getting the client to execute the trade through the sales department, generating revenue for the firm.