If the ever-expanding world of investment banking is a mystery to you, this quick rundown should aid your understanding of the basic concepts. Specifically, this article about investment banks will cover who typically owns them, their differences from retail banks, and the services they render. Once you read this, you should understand enough about these financial institutions to know what purpose they serve in the financial world.
Most investment banks in Europe and the United States are publicly traded on stock exchanges, meaning that anyone who purchased shares owns a part. But, there are also some institutions that are controlled by a small number of investors that are the majority shareholders. These major investors are usually family groupings, wealthy individuals, government entities, or directors of the institution itself. There are even some smaller variations that are set up as partnerships or are privately owned.
Difference From Retail Banks
Investment banks are completely different from the institutions that most of us use on a day-to-day basis. They operate in two completely distinct manners. Retail banks accumulate deposits from customers that are saving, and then lend that money to borrowers as loans, credit cards, and mortgages. They make a profit by charging interest on the money they lend out, which is higher than the interest earned on deposits.
Investment banks work differently. Their customers include governments, corporations, fund managers, and hedge funds. They do not make their money from interest payments. Instead, they get to charge commissions and fees for the services that they perform.
There are many services that fall under the umbrella of investment banking. However, there are four main functions financial institutions concentrate on primarily. These are giving advice, financing, trading, and research.
The advice that a financial institution gives can vary. These tips include, but are not limited to: useful information about potential merger and acquisition targets, stock exchange tips, and ways to avoid excessive tax payments. The institutions also arrange financing for corporations by issuing shares of stock or corporate bonds. Sometimes they even offer loans to companies directly.
They are able to easily trade because they are staffed with hundreds of traders that trade currencies, shares, and derivatives on the behalf of clients, or for their own interests. The research they conduct is about different industries and specific companies and the information they mine is invaluable. They then make a profit by selling this knowledge to hedge funds and fund managers.
Investment banking can be a complex concept, but now you know enough to understand the crucial role that they play for their clients. Many larger companies would be lost without the guidance, financing, and strategy given to them by their chosen institution.