An investment bank in its customers is a financial service firm that serves as an intermediary for massive and complicated financial transactions. The investment bank is often involved when a new company is getting ready for the initial public offering or when a company is merged with another competitor. They also serve as a broker and financial advisor for large institutional clients like pension funds.

The global investment banking institutions include JPMorgan Chase, Bank of America, Morgan Stanley, Goldman Sachs, Citigroup, Credit Suisse, and Deutsche Bank. Some of these banks also offer community banking at a storefront and divisions that cater to the financial requirements of people with high net worth. An investment bank could be able to do any or all of these:

• Raise equity capital
• Raise debt capital
• Assist in the introduction of new products
• Participate in trading that is proprietary. Teams of internal money managers can invest or trade company funds into a private account
• Provide advice or assistance for mergers and acquisitions
• Provide transactional and payment processing services
• Develop and test solutions to difficult financial problems

For example, XYZ Manufacturing wants to sell bonds worth $10 billion to build new factories in Asia. A financial institution could assist it in finding buyers for bonds and take care of the paperwork. It will do this with an entire team of lawyers and accountants. They can also aid with IPOs in which the private business transitions from private ownership to public ownership and is registered on the exchange.

How Do Investment Banks Work?

Most investment banks are divided into two groups: both the buying and selling sides. They do offer sell-side and buy-side services. The bank's sell-side plays a role in selling shares of the newly issued IPOs, putting out new bond issues, participating in market-making, or helping clients with transactions.

The bank's buy-side is usually associated with pension and hedge funds, mutual funds, and the public that invests. Its goal is to help clients maximize their return when investing or trading in securities, like bonds and stocks. A lot of investment banks are split into three sections depending on the type of products and services offered and the responsibility of the employees:

• Front office
• Middle office
• Back office

Front-Office Services

The typical front-office service is:

• Aiding businesses in mergers and acquisitions
• Financial services for corporations (such as issuing billions of dollars of commercial paper to finance day-to-day activities)
• Professional investment management services for institutions and high-net-worth individuals
• Merchant banking
• Research on capital markets and investment reports written by experienced analysts
• Strategy formulation

Middle-Office Services

Middle-office investment banking services comply with regulations of the government as well as restrictions for professional customers like insurance companies and finance divisions as well for capital flow. These people keep track of the money coming out and into the business, helping identify the amount of cash the business needs in reserve so that it doesn't fall into financial troubles. The group responsible for capital flows may use the information to limit trading by limiting the purchasing and trading capabilities available to other divisions.

Back-Office Services

The back-office service includes all the nuts and bolts associated with the bank's investment:

• Making sure that the proper securities are purchased and sold, then settled for the correct amount
• The software and technology platforms that enable traders to complete their work are of the latest and practical
• Making new trading algorithms

Commercial Bank vs. Investment Bank

One of the main differences between commercial and investment banks is the fact that investment banks concentrate on helping businesses gain access to capital markets. Commercial banks typically deal with loan accounts and deposits to small businesses and individuals. Investment-oriented banks in the U.S. were not allowed to be considered commercial banks following 1933. Banks that provided commercial and investment services were considered to be one of the major causes of the crash in the stock markets of 1929, as banks were able to offer investments and commercial services.

Careers In Investment Banking

The process of gaining access to i-banking can be extremely difficult. There are more applicants than openings, some up to 100 times one. When preparing for your interview, it is also helpful to take classes on valuation and financial modeling. The most popular job names (from the most junior to senior) in the field of i-banking include:

• Analyst
• Associate
• Vice President
• Director
• Managing Director
• Director, Vice-chair, or a different title

Criticism of Investment Banks

Investment banks counsel clients from outside in one area and trade with their accounts within another. This could result in a conflict of interests. To prevent this from happening, investment banks must create what's called the Chinese wall between their divisions. The idea behind this wall is to hinder sharing of information that could let one or the other make money at their own customers' expense.