What Exactly Is An Investment Bank

That’s a big question and it’s one we’re sure is at the top of your mind as you’re reading this blog or if you’ve heard of the opportunities from Bank of America Merrill Lynch and Goldman Sachs. The simple answer would have been “An Investment Bank is a bank that does Investment Banking”, but then the next question is what is Investment Banking. As usual here on The Mine, we try to make things as simple as possible. So let's go. 

An Investment Bank is a company that allows people who have money and want to generate more money from it (we call that investing and these people Investors) to meet people that need money to build their business and are willing to give something in return for it (these could be companies or even governments). They do this in 3 main ways and these are what we call the Revenue Generating or Front Office parts of an Investment Bank. They are

1. Investment Banking sometimes called Corporate Finance – It involves advising companies on strategies to finding and raising money for growth and expansion from investors. It also involves advising companies on the financial implications of various actions like merging with another company, buying another company or selling part or all of the company. The investment bank will charge the client a fee for all this advice

2. Investment Management – involves advising people and investors that have a large pile of money on how to invest it to make returns. These investors are usually very rich people (called High Net Worth Individuals [HNWI]) or insurance companies and pension funds. The common theme between these investors is that they have a lot of cash either from their businesses or salaries (in the case of HNWI) or money from customers they are collecting premiums or pension payments from (in the case of insurance companies and pension funds). This is because cash sitting down idle does not give any benefits, so an investment bank helps these clients to generate returns by advising them on where to invest their money to generate returns. The investment bank also charges a fee for helping the clients to manage their money

3. Sales and Trading – This involves the buying and selling of shares and bonds on the stock markets. This is similar to the regular market trading that you know, just that instead of buying and selling tomatoes, spare parts or cars, the banks trade shares and bonds of other companies. To make profit, they try to buy the shares low and sell it high. They can do this with the bank’s own money and make profit by buying low and selling high.

Interestingly, the stock market is a little different from the normal market because not everyone is allowed to come there to buy and sell, only registered stockbrokers are allowed to do so. So, if regular people want to buy they have to come through one of the registered stockbrokers, which many of the banks have plenty of. So if you have to buy shares and bonds, you go through an investment bank and they charge a brokerage fee for that service.

Looks like these guys are cleaning out on all levels. Sweet business eh! We’ll have an in depth look into each section in subsequent posts

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