An investment bank is not a bank where you keep your money
An investment bank does not take deposits, does not offer checking accounts, and does not lend you money for a car or a house. Instead, an investment bank helps companies and governments raise money by selling stocks and bonds to investors, advises on mergers and acquisitions, and trades securities on behalf of clients. The word "bank" in the name is historical—these institutions grew out of banking families in Europe who began underwriting bonds—but their actual work is closer to brokerage and advisory than to retail banking.
The confusion exists because some large financial institutions use the word "bank" for multiple divisions. JPMorgan Chase, for example, has a retail banking division where you might have a checking account, and a separate investment banking division that helps corporations issue stock. These are different businesses with different clients, different regulations, and different ways of making money.
Key Takeaways
- Investment banks help companies and governments raise money by underwriting stock and bond offerings, not by taking deposits from individuals.
- They earn money through underwriting fees, advisory fees on mergers, and trading commissions—not through interest on savings accounts or loan spreads.
- Investment banks are regulated differently than retail banks and face stricter rules on how much risk they can take with their own capital.
- Some investment banks are standalone firms like Goldman Sachs; others are divisions within larger financial institutions like Bank of America.
How investment banks make money
An investment bank earns fees by standing between a company and the investors who buy its securities. When a company wants to go public—to sell stock for the first time—it hires an investment bank to underwrite the offering. The bank agrees to buy all the shares the company is selling at a set price, then resells them to investors at a higher price. The difference is the underwriting fee, typically 3 to 7 percent of the total amount raised.
Investment banks also earn advisory fees. When two companies consider merging, they hire investment banks to value the deal, negotiate terms, and structure the transaction. A bank might charge millions of dollars for this work, regardless of whether the deal closes. They also earn trading commissions when they buy and sell securities on behalf of clients, and they make money from proprietary trading—using their own capital to trade for profit.
The difference between underwriting and advising
Underwriting is the core function that distinguishes investment banking from other financial services. When an investment bank underwrites a stock offering, it takes on real risk: it commits to buying all the shares at a fixed price, then must sell them to investors. If the market turns and investors lose interest, the bank is stuck holding shares it cannot sell at the promised price. This risk is why underwriting fees exist—they compensate the bank for taking on that exposure.
Advisory work carries no such risk. An investment bank advises a company on how to structure a merger, what price to offer, and how to negotiate with the other side. The bank does not commit capital and does not may provide any outcome. If the deal falls apart, the bank still gets paid for the information. Advisory fees are often smaller than underwriting fees but are more predictable because they do not depend on market conditions.
Who uses investment banks
Investment banks serve corporations, governments, and large institutional investors—not individuals. A company raising $500 million in new capital hires an investment bank. A government issuing bonds to fund infrastructure hires an investment bank. A pension fund wanting to buy a large block of shares hires an investment bank to execute the trade without moving the market price.
Individual investors do not use investment banks directly. If you buy stock through a brokerage account, you are using a broker—which may be owned by an investment bank but operates under different rules. Brokers are regulated to protect individual customers; investment banks are not, because their clients are sophisticated institutions that can protect themselves.
Investment banks versus commercial banks
A commercial bank takes deposits, makes loans, and processes payments. It earns money from the difference between what it pays depositors in interest and what it charges borrowers. An investment bank does none of these things. It does not hold your money, does not lend to individuals, and does not process your paycheck.
The two types of banks are regulated separately. Commercial banks must maintain capital reserves to cover potential loan losses and are insured by the Federal Deposit Insurance Corporation (FDIC). Investment banks must maintain capital reserves to cover trading losses and are regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). After the 2008 financial crisis, regulations tightened further: large investment banks became subject to stress tests and limits on how much risk they can take with their own capital.
Standalone investment banks versus divisions of larger firms
Some investment banks are independent companies. Goldman Sachs and Morgan Stanley are the largest standalone investment banks in the United States. They do not take deposits and do not have retail branches. All their revenue comes from underwriting, advisory, trading, and asset management.
Other investment banks are divisions within larger financial institutions. Bank of America has an investment banking division. JPMorgan Chase has one. Citigroup has one. These divisions operate under the same parent company as retail banking, but they are separate businesses with separate management, separate profit-and-loss statements, and separate regulatory oversight. The retail bank takes your deposits; the investment bank helps corporations raise capital.
What investment banks do in mergers and acquisitions
When one company wants to buy another, both sides typically hire investment banks. The selling company's bank advises on valuation—what the company is worth—and helps negotiate the best price. The buying company's bank advises on whether the purchase makes financial sense and how to structure the deal to minimize taxes.
Investment banks also arrange financing for acquisitions. If a company wants to buy another company but does not have enough cash, an investment bank will arrange a loan from other banks or help the buyer issue bonds to raise the money. The investment bank earns fees for arranging this financing, separate from advisory fees.
Frequently Asked Questions
Can I open an account at an investment bank?
No. Investment banks do not offer accounts to individuals. If you want to invest in stocks or bonds, you use a brokerage firm or the investment division of a retail bank. Some investment banks have wealth management divisions that serve very high-net-worth individuals, but these require millions of dollars in assets and are not open to typical investors.
Is my money safe at an investment bank?
This question does not explore because you do not keep money at an investment bank. If you have money at a retail bank that is part of a larger institution with an investment banking division, your deposits are insured by the FDIC up to $250,000 per account type. The investment banking division's trading losses do not affect your deposit insurance.
Why do investment banks charge such high fees?
Investment banks charge high fees because they take on risk, employ expensive talent, and often work on very large transactions. An underwriting fee of 5 percent on a $1 billion stock offering sounds like a lot until you realize the bank is committing to buy $1 billion in shares and must sell them quickly. Advisory fees reflect the cost of senior bankers and lawyers working on complex deals.
What is the difference between an investment bank and a hedge fund?
An investment bank advises clients and trades on their behalf; a hedge fund manages money for investors. An investment bank earns fees; a hedge fund earns a percentage of the returns it generates. Investment banks are regulated as broker-dealers; hedge funds are regulated as investment advisers. A hedge fund might hire an investment bank to help execute a large acquisition.
Do investment banks still exist after the 2008 financial crisis?
Yes. The crisis changed how they operate—they face stricter capital requirements and limits on proprietary trading—but the core business of underwriting securities and advising on mergers remains. Some investment banks failed or were acquired during the crisis, but the largest ones survived and continue to operate today.