An investment bank is a type of bank that serves as an intermediary between investors and corporations, governments, and institutions that seek capital to grow or develop their businesses or functions.
An investment bank can be a stand-alone entity or a division within a larger bank or financial institution. A small, or boutique, investment bank typically offers two areas of service: mergers and acquisitions, and advisory and underwriting. A full-service investment bank offers sales and trading, equity research, and asset management in addition.
The following are investment banking activities defined:
- Mergers and acquisitions, or M&A. M&A is an advisory role serving both buyers and sellers. Its functions include the consolidation of companies or assets through specific categories of financial transactions such as mergers, acquisitions, tender offers, consolidations, asset purchases and management acquisitions.
- Underwriting. Underwriting is the act of undertaking the risk associated with a venture, an investment or a loan in place of a premium. Underwriting, including capital raising, is a service that helps companies raise money or go public through an initial public offering, or IPO. The capital raised takes place within the primary market.
- Sales and trading. Sales and trading involves traders who purchase and sell securities either on behalf of the investment bank or for the bank’s clients. Sales and trading functions within the secondary market for securities. The team’s members act as agents for its clients, and they may also trade the firm’s capital.
- Equity research. Equity research is the study of a business and its sector to make a buy or sell recommendation regarding investing in its shares. The team helps its clients make informed investing and trading decisions. The research may also apply to an acquirer of a prospective acquisition deal or to determine the price at which to bid for the securities of a target company.
- Asset management. Asset management is the practice by which portfolio managers and financial advisors attempt to increase total wealth over time by acquiring, holding and trading investments that have the potential to appreciate in value. Clients range from institutional investors to high-net-worth individuals who have a broad range of investment styles.
It is important to understand the difference between a commercial bank and an investment bank. The most important distinctions are their functions and their target customers. Commercial banks take in deposits and make loans for people and businesses. Alternatively, investment banks deal with trading securities and bonds and work with institutional and governmental clients as well as high-net-worth individuals.
The following is a breakdown of the global market share by revenue of leading investment banks as of December 2021, according to Statistica:
- JPMorgan Chase & Co. (ticker: JPM) – 9.6%
- Goldman Sachs Group Inc. (GS) – 9%
- Morgan Stanley (MS) – 6.7%
- Bank of America Corp. (BAC) – 6.4%
- Citigroup Inc. (C) – 4.9%
- Barclays PLC (BCS) – 3.8%
- Credit Suisse Group AG (CS) – 3.6%
- Jefferies Financial Group Inc. (JEF) – 2.7%
- Deutsche Bank AG (DB) – 2.5%
- UBS Group AG (UBS) – 1.9%