What is Investment Banking?

Investment banking refers to a type of service that helps with the management of complex financial transactions. Investment banking aims to generate capital for institutions, businesses, and governments. An investment bank is a bank that takes on the role of an intermediary in big financial transactions. These may include IPOs, liquidations, mergers and acquisitions, and even a takeover. These organizations also act as financial advisors or brokers for large institutional clients. Thus, investment banks help companies raise funds through capital markets. This article will assist you in understanding the concept of “what is investment banking, and also discuss the types of investment banking, investment banking examples, and more.

Different Types of Investment Banks

The following breakdown may help you to understand “what are the types of investment banking.” 

• Middle-Market Banks: Middle-market investment banks fill in the gap between small/specialized companies and global banks. These firms offer a wide range of services, including mergers and acquisitions, asset management, and capital raising.
• Bulge Bracket Banks: Bulge bracket banks are one of the largest banks in the investment banking space. These organizations are located all over the world and serve the big companies. Bulge bracket banks typically have separate departments for different work to meet the wide range of financial needs of their clients.
• Elite Boutique Banks: Elite boutique banks represent a step up from regional boutique banks in size and accessibility. These institutions operate in many countries, although they do not have large global banks. Elite boutiques focus primarily on high-value transactions such as mergers and acquisitions.  
• Regional Boutique Banks: Regional boutique banks are one of the small types of investment banks. These organizations typically focus on specific geographic or industry areas. They provide specialized services to local businesses and organizations. Typically, having fewer than 30 employees, they handle smaller transactions. 

Table of Content

1. Different Types of Investment Banks
2. Example of Investment Banking
3. How does an Investment Bank Work?
4. What is the Role of Investment Banking?
5. How Do Investment Banks Differ from Commercial Banks?

Example of Investment Banking

Suppose company XYZ wants to buy another company, ABC. XYZ needs help with the process and decision of how to do it. XYZ pitches an investment bank to help with the overall project. Here, an investment bank performs several basic functions as mentioned below.

1. Analyses ABC company.
2. Figure out how much ABC is worth.
3. Look at ABC's competitors.
4. Predicts how ABC might grow in the future.

In addition to this review, the investment bank handles the entire acquisition process. They help XYZ with all the paperwork needed to buy ABC. They also determine the best time to buy for XYZ.

It should be noted that in this example the investment bank works for customers (XYZ). Other investment banks may be working on the same deal for the seller (ABC). Investment banks make capital by charging fees for their services.

How does an Investment Bank Work?

Investment banks play an important role in the economy. It can be divided into two types: the sell side and the buy side. Let’s examine the workings of investment banks. 

Sell-side of investment banks focuses on helping companies and organizations raise capital. This is done in several ways:

• Sale of shares of new companies through Initial Public Offerings (IPOs)
• Assisting companies to issue new bonds to borrow capital and various financial transactions
• Providing market-making services for the smooth running of the financial markets 

The buy-side of investment banks work with large investors such as mutual funds, pension funds, and hedge funds. 

• Their main role is to be involved in trading investments, such as stocks and bonds. 
• They also aim to generate as much revenue as possible for their clients. 

Both types of investment banks are necessary for the financial system to function properly. Together, both sides ensure that funds flow through the economy, supporting businesses and investors.

What is the Role of Investment Banking?

Investment banks provide financial services to corporations, governments, and other clients, including:  

• Assessment: Investment banks advise on the value of a company. They also spend a lot of time doing valuations, which can be a suitable way to start a career in investment banking. 
• Securities trading: Investment banks help institutional investors buy and sell securities. They also trade on Indian financial markets. 
• Research: Almost all investment banks have a research department focused on maximizing value for clients. Research is an additional work they do to support their client with sound decision-making. 
• Transaction advisory: The investment bank assesses the feasibility of the transaction and facilitates communication between the parties. Investment banks charge a fee or a fixed percentage of the contract value in exchange.
• Mergers and acquisitions: Investment banks help companies identify, evaluate, and complete the acquisition of other businesses. They can present the buyer or seller and advise on both sides of the deal. 

How Do Investment Banks Differ from Commercial Banks?

The following is the breakdown highlighting the difference between investment banks and commercial banks on the basis of various criteria.

Conclusion 
Investment banking helps companies and governments raise potential capital and manage complex financial deals. They work on both the sell side aiming to help organisations get funds. On the buy side, they aim to assist investors with financial decisions and gain potential income. Investment banks do important jobs like helping with initial public offerings (IPOs), mergers, and acquisitions. They also analyze companies, figure out their worth, and advise regarding the suitable time to make deals. Investment banks generate revenue by charging fees for these services. Their work keeps the capital flowing in the economy, which helps businesses grow and investors succeed.