Since most people only conduct business in commercial banks, many are still unaware of what exactly investment banks are, what they do and how they are able to create a huge impact on the global economy.
Here's a simplified explanation.
What is an investment bank?
Unlike a commercial bank where people deposit and withdraw money, ask for loans or mortgage, or avail of personal investments such as mutual funds.
investment banks focus on corporate deals, mergers and demergers, initial public offerings (IPO), debt and restructuring, and buying and selling of companies. Some investment banks may offer commercial banking services, but those public-based services and client base are not its primary focus.
When a company goes public or is in the middle of an acquisition deal, investment banks are the ones negotiating and transacting behind the scenes. An investment bank is the institution that bridges companies or corporations to potential investors so that the client—whichever side they work for—could get the best deal possible with their money.
Who are its preferred clients?
An investment bank clientele are companies and corporations that are, or could potentially be, movers and shakers in the economy—entities transacting millions or even billions of dollars.
What banking services do they offer?
Investment banks are experts in weighing a company’s value. Investment banks serve as mediators between companies and capitalists or investors, especially when buying or selling businesses.
They focus on negotiating the best possible price for selling or buying companies in mergers and acquisitions and give advice on how marketable or risky a business is.
They underwrite stocks or bonds for companies needing capital. Investment banks price the stocks and bonds of a company based on its assessed value. They usually purchase a certain number of shares to sell during the IPO.
They oversee the entire process of mergers and acquisitions—from finding a good matching seller or buyer to closing the deal— and the organisational restructuring is done afterwards.
How do investment banks impact the economy?
Since investment banks deal with high profile clients and high capital deals, a wrong assessment or advice could negatively impact both the local and global economy. Failures in the investment bank sector ushered in both the 1929 Great Depression and 2008 global financial crisis that started in the US.
