Investment banks: functions, roles, and key issues Investment banks specialize in large, complex financial transactions and advisory services for corporations, governments, pension funds, and institutional investors. They act as intermediaries between clients and the capital markets, helping raise capital, structure deals, and provide strategic financial advice. Key takeaways
* Investment banks underwrite securities (IPOs, secondary offerings) and arrange debt financing.
* They advise on mergers and acquisitions (M&A), valuation, deal structuring, and negotiations.
* Separate divisions—advisory, research, trading/sales—help deliver services but create potential conflicts of interest, managed by ethical or “Chinese” walls.
* Research supports trading and client advice; the trading/sales desk generates revenue through commissions and market activity.
* Careers in investment banking are lucrative but often involve long hours and high pressure.
Core functions
* Underwriting and capital raising
* Help companies go public (IPOs) and issue additional equity or corporate bonds.
* Conduct due diligence, prepare prospectuses, price securities, and place them with investors.
* Mergers and acquisitions (M&A)
* Provide valuation, negotiate terms, structure deals, and manage transaction execution.
* Large global banks handle multi-industry mandates; boutique banks often focus on specific sectors.
* Advisory and strategic finance
* Offer tailored strategic advice based on market knowledge, capital-structure optimization, and regulatory considerations.
* Trading, sales, and market making
* Facilitate buying and selling of securities for clients and, in some cases, trade proprietary positions.
* Generate revenue via commissions, spreads, and trading profits.
* Research and analysis
* Produce equity, fixed-income, macroeconomic, and quantitative research.
* Research reports inform clients and internal desks; they support sales and trading activities and preserve institutional knowledge.
How investment banks operate
* Revenue models typically include advisory fees for transactions and commissions/spreads from trading and underwriting.
* The underwriting/advisory process begins with pre-underwriting counseling, financial review, and prospectus preparation, then proceeds through distribution and post-transaction support.
* Clients include corporations, institutional investors (pension funds, hedge funds), governments, and other financial institutions.
* Size and network matter: large global banks benefit from extensive investor relationships that help match buyers and sellers, especially for complex or bespoke transactions.
Conflicts of interest and safeguards
* Different business lines (advisory, research, trading) create potential conflicts—for example, research and trading influencing one another.
* Firms use ethical walls or “Chinese walls” to restrict information flow and reduce the risk that one division unfairly leverages nonpublic information to the detriment of clients.
* Regulatory standards and internal compliance programs further govern conduct and client protections.
Retirement Security (fiduciary) considerations
* Rules that define when advisors act as fiduciaries (for retirement accounts) raise the standard of care from “suitable” to “best” advice.
* Fiduciary designation affects what products and services advisors can recommend to retirement savers and aims to reduce conflicts of interest in retirement planning.
Careers and workplace
* Typical roles include investment bankers (M&A/advisory), traders, salespeople, research analysts, and compliance professionals.
* Work is often high-pressure and time-intensive, with compensation reflecting deal-driven revenue and performance.
Bottom line Investment banks play a central role in capital markets by underwriting securities, advising on M&A and strategic finance, and connecting large issuers with institutional investors. While their diverse activities create powerful synergies, they also require robust controls to manage conflicts of interest. Understanding how investment banks operate helps businesses and investors navigate complex financing and transactional decisions. Explore More Resources