Man wearing a suit contemplating his investments

Stock Trading and Investment Banks

Investment banks assist public and private institutions is raising money for capital projects and manage those funds for investors and wealthy clients. Catering to companies and institutions, investment banks work with customers to fund major ventures.

Other investment services include managing equity and debt offerings, providing credit facilities and selling securities to investor clients. Investment institutions also provide advisory on acquisitions and mergers or other large financial transactions. Distinct from retail banks, investment institutions do not generally accept deposits or create accounts for the average consumer.

Types of Investment Banks

The two types of investment banks are bulge bracket firms and pure-play firms. Bulge bracket firms are money centers comprised of in-house investment banking divisions. These institutions offer a wide range of financial services. In a traditional bulge bracket firm, the investment banking division assists clients in the raising of funds through debt and equity offerings.

Fundraising may include the preparation of an initial public offering (IPO) for issuance and listing of shares on the stock market, or the issuance of bonds. Revenue is also generated in advisory, evaluation, and negotiation of the terms and conditions to an acquisition or merger agreement deal. In comparison, pure-play firms are designed to manage investments and are not traditional banking institutions.

Asset Management

Investment bank product groups cover a range of asset classes such as leveraged finances, bonds, commodities, or equity futures. Investment firms are generally involved in market-making activities, asset securitization, and asset management. The asset management division of an investment bank manages the money of institutional clients (such as mutual funds) and wealthy individual account clients.

Asset management is divided into three sub-divisions: fund management, private banking and wealth management, and prime brokerage. Fund management is oversight of a number of funds, each with a different focus. These could include arbitrage, private equity investment in emerging markets, or the purchasing and holding of corporate debt.

Private banking and wealth management, consisting of financial advisory on the behalf of high-wealth individuals, includes investment and tax strategy. Prime brokerage works with professional asset managers, such as hedge funds and mutual funds in execution of trades on behalf of these clients. Investment institutions in custody of those assets advise those institutional clients of growth opportunities.

How Can They Help?

Principal investing by investment banks increases return on equity. Investment of an institution's capital in profitable ventures requires confidence that a holding will pay off long term. Here, the institution invests capital in a company's equity or debt with the aim of influencing management, and ultimately growth. An investment institution may also take a short-term position in proprietary trading, based on market reporting conducted by back office financial analysts.

The two main factors affecting an investment institutions profitability are credit rating and reputation. Banks earns additional income by borrowing at a low rate and lending or investing those funds at a higher rate. Due to the fact that investment banks serve as a bridge organization between those requiring capital and investors, fair value is assumed by investors. If investor confidence fails, so too will the institution’s credibility.

Last Updated: January 24, 2017