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Unlike a commercial bank, which makes loans to individuals and businesses and holds their money in deposit accounts, an investment bank acts as an intermediary, underwriter, lender and consultant. An investment bank normally handles large, complex transactions such as mergers and acquisitions, initial public offerings or financing of major infrastructure projects such as bridges or utility systems. Goldman Sachs and J.P. Morgan are two well-known investment banks.
An investment bank plays a highly specialized role in the banking and finance industry. It’s not a place where people go to open a checking account or savings account for their personal use. Instead, investment banks focus mainly on the needs and interests of businesses and governments. For example, an investment bank might guide companies as they prepare for a merger, or help businesses build capital or manage risk. They frequently play an advisory role, helping companies and government entities determine the financial risk of large projects before they undertake them. They often work with other banks, pension funds, asset management firms, insurance companies, private equity firms, government entities and other institutions.
Some investment banks have retail branches designed specifically for serving private individual clients. Most investment banks work with wealthy clients around the world and in a wide range of industries, but some focus on serving a particular market or sector such as transportation or health care. They offer guidance on raising capital, getting rid of debt, restructuring and a host of other transactions.
Investment banks not only play an advisory role, but also a trading role. Investment banks must keep the two divisions separate so that their trading activities do not conflict with the work they do for clients.
Investment bank example
Company A wants to buy Company B and enlists an investment bank to guide it through the process from start to finish. The investment bank helps Company A determine the risks and rewards of buying Company B so that Company A can make an informed decision. The investment bank determines how much Company B is worth, and advises Company A on when to make the deal, how to structure the deal, how to compile all of the documentation, and how to follow the procedures necessary to finalize the transaction.
Bankrate’s investment calculators are great tools for tracking your savings and investment goals.