What Is an Investment Bank? What Investment Banks Do
By Markets & Investing DeskUpdated Nov 10, 2026
Definition
An investment bank helps corporations, governments and other large organizations raise capital, advises on mergers, acquisitions and IPOs, and arranges complex financial transactions.
Key takeaways
- Investment banks connect corporate and government clients with the financial markets, mainly by underwriting stock and bond offerings and advising on mergers and acquisitions.
- Most large firms also run sales and trading desks and research divisions, kept apart from advisory work by an ethical wall.
- Well-known examples include Goldman Sachs, JPMorgan Chase, Morgan Stanley and Citibank; smaller firms such as Greenhill & Co. and Guggenheim Partners often focus on particular sectors.
An investment bank is a financial institution that helps corporations, governments and other large organizations raise capital, advises them on mergers, acquisitions and initial public offerings (IPOs), and arranges complex financial transactions. Unlike a bank that takes deposits and makes household loans, its core business is connecting issuers of securities with the investors who buy them.
How an Investment Bank Works
An investment bank earns money in different ways depending on the division. Advisory teams charge fees for their work on a deal, and trading desks earn commissions and trading revenue tied to market activity. Some large firms also own commercial banking arms that earn interest on loans to consumers and businesses.
Underwriting and raising capital
When a company sells shares to the public for the first time, or issues more later, an investment bank typically underwrites the offering. Before any securities are sold, the bank reviews the company’s financial statements, helps set the offering size and price, and prepares the prospectus disclosing the company’s business and risks. It then distributes the securities to buyers and often keeps advising after the sale.
The same process applies to debt: a corporation that needs to borrow a large amount can issue bonds, and the bank finds institutional investors to buy them. Either way the company receives capital and investors receive equity or debt securities, with the bank in the middle.
Mergers and acquisitions advisory
Advising on mergers and acquisitions is the other half of the traditional business. For a buyer, the bank estimates what the target is worth using earnings multiples (for example the P/E ratio) and cash flow projections, helps negotiate a price and structures the transaction so it can close. For a seller, it finds buyers and runs the sale process.
Sales, trading and research
The sales and trading division buys and sells stocks, bonds, commodities and other securities, both for clients and, at many banks, for the firm’s own account. Research analysts study companies, industries and the economy and publish reports rating companies as buy, hold or sell. Research may not earn revenue directly, but it supports the trading teams and outside clients.
Example of an Investment Bank at Work
Hypothetical example, for illustration only. A software company decides to go public and hires an investment bank as lead underwriter. After due diligence, the bank and company agree to sell 10 million shares at $20 each.
- Gross proceeds: 10,000,000 × $20 = $200 million.
- Under a firm-commitment arrangement, the bank buys the shares from the company at a discount, say $18.90 per share, and resells them to investors at $20.
- The difference, $1.10 per share, is the underwriting spread: 10,000,000 × $1.10 = $11 million for the bank and any partner banks in the syndicate.
- The company receives 10,000,000 × $18.90 = $189 million before its other offering costs.
In a firm commitment the bank carries the risk of unsold shares; in a “best efforts” deal it only agrees to sell as many as it can and does not guarantee the proceeds. The spread above is invented to show the arithmetic, not a market rate.
Who Uses Investment Banks
Clients include corporations, pension funds, hedge funds, other financial institutions and governments: a city issuing municipal bonds, a pension fund buying large blocks of bonds and a private company planning a sale may all use the same bank.
Size helps: the more relationships a bank has worldwide, the more likely it is to find a buyer for an unusual security or a counterparty for an unusual deal. The largest firms cover many industries globally, while smaller “boutique” banks specialize in one sector, such as healthcare.
Investment Banker vs. Investment Bank
An investment bank is the firm; an investment banker is a professional in its advisory or capital-raising divisions who builds financial models, prepares pitch materials and offering documents, runs valuations and manages deals. Others at the firm work as traders, salespeople, research analysts or financial advisors. The careers pay well but involve long hours and heavy pressure.
Investment Bank vs. Commercial Bank
A commercial bank takes deposits and lends money to individuals and businesses, earning the difference between the interest it pays and the interest it charges. An investment bank does not depend on deposits; it earns fees, spreads and trading revenue from helping clients issue, buy and sell securities and complete deals.
In the United States, the Glass-Steagall Act of 1933 separated commercial from investment banking after the bank failures of the Great Depression. The Gramm-Leach-Bliley Act of 1999 repealed those separations, allowing today’s combined firms that hold deposits and underwrite IPOs through different subsidiaries.
An investment bank is also different from a retail brokerage. A brokerage executes trades for individual investors in securities that already exist on the secondary market, while an investment bank helps create and place new securities in the primary market. Many large banks have broker-dealer units that do both.
Limitations and Criticisms of Investment Banks
The main criticism is conflict of interest. A bank may advise a company on a deal while its traders take positions in that company’s securities, and its analysts may rate the stock of a client paying it fees. Banks therefore maintain an ethical wall (sometimes called a Chinese wall), an information barrier meant to keep confidential deal information from traders or analysts who could profit from it at clients’ expense. It reduces the risk only as far as the bank enforces it.
Underwriters are paid when deals happen, so their incentive is to complete transactions, and an IPO price reflects the bank’s and issuer’s judgment, not a guarantee of how the stock will trade. Because analysts may work at a firm with a banking relationship with the company they rate, investors often read ratings alongside their own analysis of figures such as earnings per share.
FAQs
Why is it called a bank if it doesn't take deposits?
The name reflects its role as a banker to businesses and governments: arranging finance, raising capital and moving large sums between parties, largely through the securities it issues and trades. Some investment banks belong to groups that also hold deposits, but investment banking itself is about capital markets, not savings accounts.
The Bottom Line
Investment banks matter to companies raising money, organizations buying or selling businesses, and investors who buy newly issued stocks and bonds. They earn fees, spreads and trading revenue by completing deals, so their incentives favor getting transactions done. Investors should treat an IPO price as a judgment, not a guarantee, and read analyst ratings alongside their own review of the company's figures.
