Nearly everyone is familiar with commercial banks such as Wells Fargo and Bank of America. These banks exist to provide saving and lending services to private citizens; including but not limited to mortgage and auto loans, checking and savings services and retirement accounts. It’s likely that most of you deal with at least one commercial bank. An investment bank on the other hand exists to provide services to private and public companies. This includes raising capital through the issuance and sale of both securities and bonds, assisting in mergers and acquisitions and providing guidance and advisory services for other corporate financial transactions.
In the beginning the purpose of an investment bank was to help companies raise capital through equity offerings and debt issuance and to advise and assist with mergers and acquisitions. Since then the role of the investment bank has evolved and expanded dramatically. These days investment banks are involved with their original purposes, but they are also performing much more diversified activities. These banks now offer brokerage services to both corporate and individual investors, they underwrite and sell new equity issues, they provide financial and security advice to corporate clients and they provide financial research to all types of clients. In addition, they have become involved in creating many of the leveraged instruments that have caused so much financial trauma, they deal with foreign exchange (another leveraged area) and they provide private banking for high net worth individuals.
Though the spotlight has recently been put on the investment banks role in creating highly leveraged debt instruments, their primary role is still one of helping corporations to raise capital. When a company needs additional capital it can go about raising it in one of two ways. The investment bank can sell equity in the company in the form of a stock offering or they can offer advice on the issuance of debt, or bonds, by the company. In some cases this issuance of equities or debt is placed privately, in other words the instruments are not offered in the open markets, but are rather sold to private individuals or companies. If this is the case, the investment bank often acts as a broker by bringing together the two involved parties. These private transactions include not only private equity investments and private debt placements, but also merchant banking services, strategic investments and venture capital investments.
As you might imagine, an investment bank often has a broad network of contacts within the financial industry. This network extends globally and includes insurance, foreign exchange, legal and corporate contacts. A good investment bank will be able to use this network to provide detailed market knowledge and guidance, legal advice and investment opportunities on a global, countrywide or regional level. For this reason investment banks are highly regarded for helping to create a competitive advantage to the clients they advise.