Investment banks act as financial intermediaries in the capital markets
Whilst different investment banks are structured differently, broadly speaking, the activities and functions are grouped under two distinct business divisions:
- Investment Banking Division (“IBD”) – often referred to as the “Corporate Finance Division”
- Capital Markets Division (“CMD”)
IBD clients are typically businesses (companies) and sometimes governments who are both essentially “users” of capital in that they require money in order to fund projects and growth. Generally speaking, companies raise capital by issuing shares (equity) or bonds (debt) in exchange for money.
CMD clients, on the other hand, are typically investment funds who are essentially “suppliers” of capital in that they have money which they seek to invest in the hope and expectation of realising a return. They may provide money to a company in return for shares or bonds, which confer a claim on the company’s cash flow and assets.
The primary function of an investment bank is to act as a financial intermediary in the capital markets connecting the above users and suppliers of money. Hence, it acts as an underwriter for companies raising money in the capital markets. The other key functions are to advise companies on mergers & acquisitions (“M&A”) and to act as a “market maker” in the financial securities market.
Some of the best-known global investment banks include Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America Merrill Lynch, UBS Investment Bank and Deutsche Bank.
Full service financial services firms offer a broad range of services including commercial banking, investment banking, insurance, asset management and wealth management are sometimes incorrectly labelled as “investment banks”. Note that, in these conglomerate firms, the investment bank may be one of a number of distinct business areas.