what is investment banking 
investment banking is a type of banking that organizes large complex financial transactions such as mergers or initial public offering ipo underwriting these banks may raise money for companies in a variety of ways including underwriting the issuance of new securities for a corporation municipality or other institution they may manage a corporation s ipo investment banks also provide advice in mergers acquisitions and reorganizations in essence investment bankers are experts who have their fingers on the pulse of the current investment climate they help their clients navigate the complex world of high finance ellen lindner investopediaunderstanding investment bankinginvestment banks underwrite new debt and equity securities for all types of corporations aid in the sale of securities and help facilitate mergers and acquisitions reorganizations and broker trades for institutions and private investors investment banks also provide guidance to issuers regarding the offering and placement of stock 1many 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 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 investment banks activities also may include issuing securities as a means of raising money for the client groups and creating the documentation for the u s securities and exchange commission sec necessary for a company to go public investment banks employ investment bankers 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 before the client moves forward 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 regulation and investment bankingthe glass steagall act was passed in 1933 after the 1929 stock market crash led to massive bank failures the purpose of the law was 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 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 was passed banks could divert retail depositors funds into speculative operations such as investing in the equity markets as such operations became more lucrative banks took larger and larger speculative positions eventually putting depositors funds at risk however the stipulations of the act were considered harsh by some in the financial sector and congress eventually repealed the glass steagall act in 1999 the gramm leach bliley act 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 initial public offering ipo underwritingessentially investment banks serve as middlemen between a company and investors when the company wants to issue stock 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 subsequently as a proxy for the company launching the ipo the investment bank will sell the shares on the market this makes things much easier for the company itself as it effectively contracts out the ipo to the investment bank moreover the investment bank stands to make a profit as it will generally price its shares at a markup from what it initially paid for them in doing so it also takes on a substantial amount of risk although experienced analysts use their expertise to accurately price the stock as best they can the investment bank can lose money on the deal if it turns out that it has overvalued the stock as in this case it will often have to sell the stock for less than it initially paid for it example of investment bankingsuppose that pete s paints co a chain supplying paints and other hardware wants to go public pete the owner gets in touch with jos an investment banker working for a larger investment banking firm pete and jos strike a deal wherein jos 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 jos s firm has lost 40 000 on the deal because it overvalued pete s paints investment banks often will compete with one another to secure ipo projects which can force them to increase the price they are willing to pay to secure the deal with the company that is going public 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 