# What Investment Bankers Do: A Guide to Investment Banking Explained

## What Is Investment Banking?

Investment banking organizes intricate financial transactions, including [IPOs](https://www.investopedia.com/terms/i/ipo.asp) and mergers. Investment bankers guide corporations through high-finance challenges by raising capital and advising on potential mergers and acquisitions.

### Key Takeaways

*   Investment banking involves organizing large financial transactions, such as mergers and initial public offerings (IPOs).  
    
*   Investment banks assist corporations, governments, and other institutions in raising money by underwriting new securities.  
    
*   The Glass-Steagall Act initially separated investment and commercial banking, a separation repealed in 1999, allowing banks to conduct both activities.  
    
*   Investment bankers provide expert advice and management for large projects, identifying risks to save clients time and money.  
    
*   When a company goes public through an IPO, investment banks typically serve as intermediaries between the company and investors.

![Investment Banking](https://www.investopedia.com/thmb/FJXz_Rc-KenqoNKDNA63qbLEWl0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/investment-banking.asp-43442f55f0ee4d9ab0185c3c6a8fb450.jpg)

*— Ellen Lindner / Investopedia*

## Key Functions and Operations of Investment Banking

Investment banks underwrite new debt and equity securities for all types of corporations, aid in the sale of securities, and help facilitate [mergers and acquisitions](https://www.investopedia.com/terms/m/mergersandacquisitions.asp), reorganizations, and broker trades for institutions and private investors. Investment banks also [provide guidance](https://www.investopedia.com/ask/answers/05/investmentbankfig.asp) to issuers regarding the offering and placement of stock.

Many large investment banking systems are affiliated with or subsidiaries of larger banking institutions, and many have become household names, the largest being Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America Merrill Lynch, and Deutsche Bank.

Broadly speaking, investment banks assist in large, complicated financial transactions. They offer advice on company valuation and deal structuring during acquisitions, mergers, or sales. They issue securities for fundraising and handle SEC paperwork to help companies go public.

> **Fast Fact**
>
> Investment bankers help organizations plan large projects, saving time and money by identifying risks early.

In theory, investment bankers are experts who have their finger on the pulse of the current investing climate, so businesses and institutions turn to investment banks for advice on how best to plan their development, as investment bankers can tailor their recommendations to the present state of economic affairs.

## Investment Banking Regulations: Past and Present

The [Glass-Steagall Act](https://www.investopedia.com/articles/03/071603.asp) was passed in 1933 after the 1929 stock market crash led to massive bank failures. The law aimed to separate commercial and investment banking activities.

The mixing of commercial and investment banking activities was considered very risky and may have worsened the 1929 crash. This is because, when the stock market crashed, investors rushed to draw their money from banks to meet [margin calls](https://www.investopedia.com/terms/m/margincall.asp) and for other purposes, but some banks were unable to honor these requests because they too had invested their clients' money in the stock market.

Before Glass-Steagall, banks could use retail deposits for risky investments. As such operations became more lucrative, banks took larger and larger speculative positions, eventually putting depositors' funds at risk.

Some in finance deemed the act harsh, leading to its repeal in 1999. The [Gramm-Leach-Bliley Act](https://www.investopedia.com/terms/g/glba.asp) of 1999 thus eliminated the separation between investment and commercial banks. Since the repeal, most major banks have resumed combined investment and commercial banking operations.  

## The Investment Bank's Role in IPO Underwriting

Investment [banks act as intermediaries](https://www.investopedia.com/ask/answers/060115/what-difference-between-investment-and-retail-bank.asp) between companies and investors issuing stocks or bonds. The investment bank assists with pricing financial instruments to maximize revenue and with navigating regulatory requirements.

Often, when a company holds its IPO, an investment bank will buy all or much of that company's shares directly from the company.

The investment bank then sells the shares on the market for the company. This makes things much easier for the company itself, as it effectively contracts out the IPO to the investment bank.

The bank aims to profit by selling shares at a markup. In doing so, it also takes on a substantial amount of risk. Even expert analysts can misprice stocks, leading to losses if shares sell for less.

## Example Scenario: How Investment Banks Facilitate IPO Deals

Suppose that Pete's Paints Co., a chain supplying paints and other hardware, wants to go public. Pete, the owner, gets in touch with José, an investment banker working for a larger investment banking firm.

Pete and José strike a deal wherein José (on behalf of his firm) agrees to buy 100,000 shares of Pete's Paints for the company's IPO at the price of $24 per share, a price at which the investment bank's analysts arrived after careful consideration.

The investment bank pays $2.4 million for the 100,000 shares and, after filing the appropriate paperwork, begins selling the stock for $26 per share. However, the investment bank is unable to sell more than 20% of the shares at this price and is forced to reduce the price to $23 per share to sell the remaining shares.

For the IPO deal with Pete's Paints, then, the investment bank has made $2.36 million \[(20,000 × $26) + (80,000 × $23) = $520,000 + $1,840,000 = $2,360,000\]. In other words, José's firm has lost $40,000 on the deal because it overvalued Pete's Paints.

Banks compete for IPOs, often raising their bids to secure deals. If competition is particularly fierce, this can lead to a substantial blow to the investment bank's bottom line.

Most often, however, there will be more than one investment bank underwriting securities in this way, rather than just one. While this means that each investment bank has less to gain, it also means that each one will have reduced risk.

## What Do Investment Banks Do?

Investment banks help with [large financial transactions](https://www.investopedia.com/terms/l/lehmanformula.asp). They may provide advice on how much a company is worth and how best to structure a deal if the investment banker's client is considering an acquisition, merger, or sale.

Essentially, their services include underwriting new debt and equity securities for all types of corporations, providing aid in the sale of securities, and helping to facilitate mergers and acquisitions, reorganizations, and broker trades for both institutions and private investors. They also may issue securities as a means of raising money for the client groups and create the necessary U.S. Securities and Exchange Commission (SEC) documentation for a company to go public.

## What Is the Role of Investment Bankers?

Investment banks employ people who help corporations, governments, and other groups plan and manage large projects, saving their clients time and money by [identifying risks associated with the project](https://www.investopedia.com/articles/professionals/092515/career-advice-investment-banking-vsinvestment-management.asp) before the client moves forward. In theory, investment bankers should be experts who have their finger on the pulse of the current investing climate. Businesses and institutions turn to investment banks for advice on how best to plan their development. Investment bankers, using their expertise, tailor their recommendations to the present state of economic affairs.

## What Is an Initial Public Offering (IPO)?

An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors. Companies must meet requirements set by [exchanges](https://www.investopedia.com/terms/e/exchange.asp) and the SEC to hold an IPO. Companies hire investment banks to underwrite their IPOs. The underwriters are involved in every aspect of the IPO due diligence, document preparation, filing, marketing, and issuance.

## The Bottom Line

Investment banks, such as Goldman Sachs and Morgan Stanley, play a pivotal role in the financial market by assisting clients in managing large, complex financial transactions. They offer services like underwriting new debt and equity securities, facilitating mergers and acquisitions, reorganizations, and executing trades for clients. These institutions also help organizations raise capital through initial public offerings (IPOs) and ensure compliance with regulatory requirements by preparing necessary documentation for companies going public. Understanding the services provided by investment banks can empower businesses and investors to navigate high-stakes financial decisions effectively.

> **Article Sources**
>
> 1.  Federal Reserve History. "[Banking Act of 1933 (Glass-Steagall Act)](https://www.federalreservehistory.org/essays/glass-steagall-act)."
>     
> 2.  Federal Trade Commission. "[Gramm-Leach-Bliley Act](https://www.ftc.gov/business-guidance/privacy-security/gramm-leach-bliley-act)."