Investment Bank
An investment bank is a financial institution that helps corporations, governments, and other entities raise capital through securities offerings, advises on mergers and acquisitions, and facilitates trading in financial markets.
Investment banks occupy a distinct role in the financial system from commercial banks, though the line between the two blurred after the Gramm-Leach-Bliley Act of 1999 repealed the Glass-Steagall separation that had kept them apart since 1933. The largest U.S. financial institutions — Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America, and Citigroup — operate investment banking divisions alongside commercial banking operations.
The core investment banking function is underwriting — the process of helping issuers bring new securities to market. When a company wants to raise equity capital through an IPO or a follow-on offering, or when a government or corporation wants to issue bonds, an investment bank structures the offering, prices the securities, and distributes them to institutional and retail investors. The bank underwrites the deal by purchasing the securities from the issuer and reselling them, earning an underwriting fee and a spread between the purchase price and the resale price.
Mergers and acquisitions (M&A) advisory is another major revenue source. Investment banks advise corporate clients on acquisitions, divestitures, leveraged buyouts, and restructurings, providing valuation analysis, deal structuring, negotiation support, and regulatory guidance. M&A advisory fees are typically paid as a percentage of transaction value, making large deals highly lucrative.
Sales and trading divisions generate revenue by buying and selling securities — equities, fixed income, currencies, commodities, and derivatives — both as agents for clients and as principals risking the firm's own capital in market-making activities. Research departments produce analysis on companies and markets, supporting the sales and trading function and building relationships with institutional clients.
Investment banks are primarily regulated by the SEC and, through their broker-dealer subsidiaries, by FINRA. Since the 2010 Dodd-Frank Act, the Volcker Rule has restricted banks from engaging in proprietary trading unrelated to client facilitation, though implementation and scope have been subject to ongoing regulatory debate.