Investment banking plays a key role in global economics. For instance, as of July 2019, JP Morgan constituted 9.0% of the global investment banking revenue. However, for the majority of us, investment banking is a mystery.
By learning about investment banking today, you’ll be ready to make informed choices if you want to improve your financial situation through IPO investing.
Read on as we answer the question: “What is investment banking?”
What is Investment Banking?
The duties of investment banks are completely different than traditional banking. While the traditional banks we’re used to visiting take in deposits from consumers and businesses and lend out money, investment banks sell securities. They also help finance large projects that traditional banking won’t touch due to the high risks involved.
Robert Johnson, Professor of finance at Heider College of Business, Brighton University, puts it simply. “Investment banking is a method of controlling the flow of money.” With the huge amounts of money at stake, investment banks have a key role in American economics.
The projects they finance include:
Large Financial Projects
Projects such as constructing infrastructure need large amounts of upfront cash. Investment banks are able to accumulate this cash by selling securities to investors.
Instead of acquiring loans to gain capital, entrepreneurs who want to expand their companies sell portions of their companies to the public, or an initial public offering (IPO). Investment bankers are integral to this process, and it’s one of their most important functions. They find investors looking to buy and companies looking to sell.
Initial public offerings are risky investments – there’s no guarantee that they’ll increase in value, though some IPOs are wildly successful. However, if you’re ready to invest in an IPO, you can do so by opening a brokerage account.
Typically, the IPO price is fixed for a limited group of investors who fit the eligibility requirements. For most investors, the price of the IPO will be higher once it begins officially trading.
According to the investment bank UBS, out of 7,000 companies between 1975 and 2011, 60% had negative total returns after five years of public trading. Do your research, buy conservatively, and keep a balanced portfolio to mitigate your risks!
Mergers and Acquisitions
Another way that companies can expand is through mergers and acquisitions. Investment bankers will help companies buy another, which can be more cost-effective than trying to compete.
Despite the risks, buying companies still has a lot of benefits. A company may want access to international markets through a company that’s already established in another region. A larger company may be interested in a smaller company’s technology. They may also want to integrate vertically, such as buying a supplier of materials they need.
Asset Management and Brokerage Services
Investment bankers help clients manage their money and generate returns. They do this by choosing individual stocks or putting their money into mutual funds.
The Top Investment Banks
These top investment banks were able to maintain and grow their market positions throughout volatile years. In terms of investment revenue, the top investment banks include:
1. Goldman Sachs
Headquartered at 200 West Street, New York City, Goldman Sachs operates branches throughout the world in all major financial centres. In 2018, its investment banking revenue was $7.86 billion. In 2019, they had a market capitalization of $78 billion.
2. JP Morgan
JP Morgan is the second largest investment bank in the world. In 2018, it reported $7 billion in revenue. It’s also one of the oldest financial institutions in the world with a history that goes back to 1799.
3. Bank of America
In 2019, Bank of America rebranded its investment arm to Bank of America Securities. In 2018, it’s investment banking revenue was $5.3 billion.
4. Morgan Stanley
Morgan Stanley is based in New York with branches in 40 different countries. In 2018, it’s totally investment banking revenues were $6.1 billion.
Also located in New York, Citigroup Inc. had reported total revenue of $72.9 billion in 2018. It’s one of the big four banks in the United States and the third-largest bank in the world.
Barclays Investment Bank, the investment arm of Barclays, is headquartered in London and has branches in 30 different countries. Its global investment banking fee share is approximately 4.2%.
7. Credit Suisse
In 2018, Credit Suisse reported a net income of $1.8 billion, attributable to shareholders in the United States. Based in Zurich and established in 1856, it has branches in 50 countries.
8. Deutsche Bank
This is the leading financial institution in Germany and one of the largest investment banks in Europe. It has about $2.5 billion in investment banking revenue and a market capitalization of $15 billion in 2019. It has branches in 60 other countries.
9. Wells Fargo
Wells Fargo offers banking and investment services in 40 countries. As of 2018, it’s generated investment banking fees are $1.8 billion.
10. Jefferies Financial Group
This full-service investment bank founded in 1962 is based in New York with regional offices in London and Hong Kong. It also has offices in 30 cities throughout America, Europe, and Asia. In 2018 its investment banking revenues were $1.9 billion.
Demystifying Investment Banking
If you’ve ever asked yourself what is investment banking, you should now understand the basic premise. Investment banking is all about the flow of large amounts of money from one institution to another, and through research, analysis, and recommendations, investment bankers try to find the best deals for their clients.
Want to read more about the state of investment banking today in the global economy? Keep reading our banking section for more informative articles.