The architects of capital formation.
© Corona Borealis/stock.adobe.com; Photo illustration EncyclopÊdia Britannica, Inc.
- Also Known As:
- merchant bank
An investment bank is a financial institution that helps corporations, governments, and other organizations raise money through the issuance of stocks, bonds, and other securities. Investment banks also advise clients on mergers, acquisitions, initial public offerings (IPOs), and other major financial transactions.
How investment banks work
A company may raise money by selling stock to finance expansion or by issuing bonds to borrow from investors. Governments typically raise money by issuing bonds to fund public projects and other expenditures. Investment banks help structure, market, and underwrite those offerings.
The process, known as underwriting and distribution, begins long before any securities are sold to the public. An investment bank typically advises the client on:
- How much money to raise
- What type of security or securities to issue
- How an offering should be structured
- When it should come to market
The investment bank also helps determine the terms of an offering (e.g., the price of an IPO or the interest rate on a bond issue) to balance the issuerâs financing needs with investor demand.
Why do some IPOs have more than one investment bank?
Large stock and bond offerings are often handled by a syndicate, a group of investment banks that share the work and the risk. One bank serves as the lead underwriter, coordinating the offering, while the others help market and distribute the securities to investors.
Syndicates allow issuers to reach a broader group of investors while spreading the financial risk among several banks. They are common in large IPOs and major bond offerings. Learn more about the IPO process.
In many cases, the investment bank underwrites the offering by agreeing to purchase some or all of the securities from the issuer before reselling them to investors. By assuming that risk, the bank helps guarantee that the issuer receives the planned financing.
Capital markets and advisory services
Raising money through stock and bond offerings is one of an investment bankâs best-known functions, but it isnât the only one. Investment banks also advise corporations, governments, institutional investors, and other clients on a wide range of complex financial transactions and market activities, including:
- Mergers and acquisitions
- Corporate restructurings
- Securities trading and market making
- Research and institutional brokerage
- Risk management
Angels, VCs, and funding rounds: The pre-IPO process
Many investment banks also operate broker-dealers that buy and sell securities on behalf of clients and, in some cases, for the bankâs own account.
The largest investment banks
Investment banking ranges from specialized boutique firms that advise on a limited number of transactions to multinational financial institutions serving clients around the world. Top global investment banks include:
Many of todayâs largest investment banks also operate commercial banking businesses or are part of diversified financial holding companies.
Investment banks help organizations raise capital through the issuance of stocks and bonds and advise on complex financial transactions. Commercial banks accept deposits, extend credit, and provide banking services to consumers and businesses.
The distinction between the two became less pronounced after the financial crisis of 2007â08. For example, top investment banks Merrill Lynch and Bear Stearns were acquired by Bank of America and JPMorgan Chase, respectively. Meanwhile, top investment banks Goldman Sachs and Morgan Stanley were granted commercial bank charters and began offering retail banking services.
This article was most recently revised and updated by Doug Ashburn
