Investment banks help companies and wealthy individuals move large amounts of money and securities, rather than storing deposits the way your regular bank does
An investment bank is a financial firm that arranges major transactions — like when a company wants to sell shares to the public for the first time, or when two large companies want to merge. Investment banks do not take deposits from regular customers or offer checking accounts. Instead, they earn money by charging fees on these large deals and by trading securities (stocks and bonds) on their own account.
If you have a regular bank account, you are unlikely to interact directly with an investment bank. But investment banks shape the financial world in ways that affect you indirectly — through the companies you work for, the retirement accounts you may have, and the stability of the overall financial system.
Key Takeaways
- Investment banks do not take deposits or offer checking accounts; they work on large corporate deals and securities trading instead.
- The main services investment banks provide are underwriting (helping companies issue new stock or bonds), mergers and acquisitions information, and trading securities for clients and themselves.
- Investment banks are regulated differently than regular banks because they take on more risk and handle larger sums of money.
- Some large financial institutions operate both a regular bank and an investment bank division, but the two operate under separate rules.
How investment banks make money
Investment banks earn fees by arranging deals. When a company wants to go public — meaning it wants to sell shares of itself to investors for the first time — the investment bank helps price those shares, finds buyers, and handles the paperwork. The company pays the bank a percentage of the money raised, typically between 3 and 7 percent.
Investment banks also earn money by trading. They buy and sell stocks, bonds, and other securities both for their clients and for their own profit. A trader at an investment bank might buy a large block of shares in the morning and sell it by afternoon, keeping the difference as profit. This is different from a regular bank, which makes money mainly from the interest it charges on loans.
A third source of income is advisory work. When two companies want to merge, or when a company wants to restructure its debt, they hire investment banks to analyze the deal and negotiate terms. The bank charges a flat fee or a percentage of the deal value.
The difference between investment banks and regular banks
A regular bank (also called a commercial bank) takes deposits from individuals and businesses, pays interest on savings accounts, and lends that money out as mortgages and business loans. An investment bank does none of this. It does not hold your paycheck or offer you a savings account.
Regular banks are required to keep a certain amount of cash on hand at all times, called capital reserves, to protect depositors if loans go bad. Investment banks face different rules because they do not have depositors to protect — they have clients who are sophisticated investors or large corporations that understand the risks they are taking.
The 2008 financial crisis happened partly because some investment banks took on too much risk and collapsed. After that, the government created stricter rules for investment banks, including requirements to hold more capital and to separate some of their riskier trading from their advisory work.
What "underwriting" means
Underwriting is the process of helping a company issue new securities — usually stock or bonds. When a company decides to raise money by selling shares to the public for the first time, it hires an investment bank to underwrite the deal.
The investment bank's job is to figure out what price to set for the shares, find institutional investors (like pension funds and insurance companies) willing to buy them, and handle all the legal and regulatory paperwork. The bank essentially guarantees that it will sell a certain amount of shares at an agreed price — if it cannot find enough buyers, the bank absorbs the loss.
Underwriting also applies to bonds. When a company or government wants to borrow money by issuing bonds, an investment bank helps price them, finds buyers, and manages the sale. The bank charges a fee for this service, which is why companies use investment banks rather than trying to sell securities directly.
Mergers, acquisitions, and advisory services
When one company wants to buy another, or when two companies want to combine, they hire investment banks to advise them. The bank analyzes whether the deal makes financial sense, helps negotiate the price, and structures the transaction in a way that is favorable to its client.
Investment banks also advise companies on how to restructure their debt, how to raise capital, or how to enter new markets. This advisory work requires deep knowledge of an industry and access to information about other companies in that space. Large investment banks employ analysts who specialize in specific industries — healthcare, technology, energy — and can tell a client whether a deal is likely to succeed.
These advisory services are highly profitable because they involve large sums of money. A fee of 1 percent on a billion-dollar merger is 10 million dollars.
How investment banks are regulated
Investment banks are regulated by the Securities and Exchange Commission (SEC), which oversees the buying and selling of securities. They are also regulated by the Financial Industry Regulatory Authority (FINRA), which sets rules for how brokers and dealers must behave.
After the 2008 financial crisis, the Dodd-Frank Act created new rules for large investment banks. These rules require them to hold more capital (money set aside as a cushion), to stress-test their portfolios (imagine what would happen if markets crashed), and to separate some of their riskier trading activities from their advisory work. The rule separating risky trading from advisory work is sometimes called the Volcker Rule.
Investment banks must also register with the SEC and pass background checks. Their employees who deal with clients must pass exams (like the Series 7 or Series 65) to prove they understand securities laws and can give information responsibly.
Why investment banks matter to you
You may never walk into an investment bank, but investment banks affect your life in several ways. If you have a 401(k) or an IRA, the fund manager may use investment banks to buy and sell securities on your behalf. If your company goes public, an investment bank will have underwritten that offering. If your employer is acquired by another company, investment banks will have advised both sides.
Investment banks also play a role in the stability of the financial system. When investment banks fail or take on too much risk, it can trigger a broader financial crisis that affects regular banks, job markets, and the overall economy. This is why the government regulates them closely and why their actions matter even to people who never do business with them directly.
Frequently Asked Questions
Can I open an account at an investment bank?
No. Investment banks do not offer checking accounts, savings accounts, or other deposit products. If you want to invest in stocks or bonds, you would use a brokerage firm or a regular bank's investment division, not an investment bank itself.
Is Goldman Sachs an investment bank?
Goldman Sachs is one of the largest investment banks in the world, though it also operates a regular banking division. It is known for underwriting major stock offerings, advising on mergers, and trading securities. Other large investment banks include JPMorgan Chase's investment division, Morgan Stanley, and Bank of America's Merrill Lynch.
What is the difference between an investment bank and a brokerage?
A brokerage buys and sells securities on behalf of individual investors — you can open an account and trade stocks yourself. An investment bank works on much larger deals with corporations and wealthy institutions. Some large firms operate both a brokerage and an investment bank division.
Do investment banks take deposits?
Some large investment banks have acquired regular banks and now take deposits, but their core business is not deposit-taking. They earn money from fees on deals and from trading, not from the interest spread on loans.
Why do investment banks need so much capital?
Capital is money set aside to absorb losses if trades go wrong or deals fall through. Because investment banks handle enormous sums and take on significant risk, regulators require them to hold enough capital to survive major market disruptions without collapsing.