What is investment banking?

Why do investment banks exist and how do they contribute to the economy? What do each of the major divisions do?
Investment banking

The main revenue-generating work of most investment banks can be divided into two main sections: corporate finance and advice, and markets.

Corporate finance and advice: M&A, loan finance and capital markets

This side of the bank is known as the private side and also, confusingly, as the investment banking division. These two alternative names give you a clue as to what the work here is all about: providing clients with confidential advice on, and assistance with financial transactions. Corporate finance and advice mainly helps clients to raise money and to buy and sell other businesses.

There are several main streams to this side of the bank's work, and those working here are likely to specialise in one of the areas below. You'll also find experts in particular industry sectors or geographical regions working here.

Mergers and acquisitions (M&A)

Bankers working in M&A advise clients involved in large corporate transactions. These are likely to be the sale and purchase of other businesses or parts of other businesses. But transactions could also include a spin-off of a section of a client's business into an independent entity, or a defence to a hostile takeover.

Bankers working here will assist their clients through the whole process of a large corporate deal. They'll formulate a strategy with their clients, deciding what kind of transaction to embark on, or assessing a potential transaction. They'll then play a significant role in the sharing and evaluation of all the information, particularly financial information, involved in this kind of transaction, which could involve valuing a company to be bought or sold (known as the "target"), or marketing it to potential purchasers. They'll be involved in bidding and negotiation processes, which are often complex and involve many different parties. Finally, they'll help to ensure that the very large sums of money involved in these deals are safely exchanged to enable the transaction agreed to actually take place.

Read the full M&A department profile

Loan finance

Bankers working in loan finance advise clients on how to raise money from banks or other lenders, such as pension funds. The loan packages arranged could be bilateral, meaning made by one bank only, or, more likely, syndicated, which means made by a group of different banks or other parties. Loans can also be secured, meaning backed by assets, or unsecured. Loan packages made tend to be a combination of different types of debt, made on different terms by different groups of lenders, typically a combination of senior debt and junior/mezzanine debt, where senior lenders have the right to be repaid before the junior or mezzanine lenders.

Bankers here will advise borrowers on what kind of debt they should take on and then, if the deal is to be a syndicated one, will put together a "book" of lenders. Important specialised areas of loan finance include leveraged finance, where bankers assist borrowers on raising money specifically to acquire a target company, and project finance, where a loan is made to fund an infrastructure project. Bankers working here might also advise companies in financial distress on how to restructure their debt.

Capital markets

Bankers working in capital markets advise clients on how to raise money on the public markets through issuing equity, that is, shares or bonds, which are pieces of corporate debt. An important area of equity capital markets work is involvement in IPOs, initial public offerings of a company's shares in the market. Bond issues might be "straight" corporate bonds, or convertibles, which can be converted by the purchaser into shares at a later date. The banks who run these deals for clients and often guarantee the purchase of the shares or debt in the market are known as the deal's "underwriters".

Bankers working in this area will first advise the client on the best way for them to use the markets to raise the money they need. They will then undertake close analysis of the company, known as the "issuer" and the production of the detailed documents used to market the shares or bonds to potential investors. Finally, they will set the price at which the shares or bonds are offered on the market.

Read the full capital markets department profile

How do these kinds of work bring in revenue for investment banks?

The main way in which investment banks make money from these deals is through the fees that they charge for their involvement, which is often a percentage of the value of the deal. If the bank is a lender on a financing, they will also be entitled to interest payments.

Who are the key clients of this part of the bank?

Corporates: Large companies or groups of companies are likely to come to investment banks for advice on buying or selling businesses or parts of businesses, or on other kinds of corporate transaction. They will also come to investment banks to raise money, both through syndicated loans and the markets.

Governments: Investment banks might assist them in issuing government bonds (UK ones are known as gilts) or in making and arranging investments, for example, in infrastructure projects.

Private equity funds: These funds, which specialise in buying companies, reshaping them and selling them on for a profit, are significant users of investment banks' capital raising services, as their purchases will usually be funded by bank debt.

Individuals: Investment banks might occasionally assist high net worth individuals in raising capital, or in buying or selling a business.

How long do deals here take?

Deals here tend to be long-term projects, lasting anything from a few weeks for a simple bilateral loan, to three to six months for a big acquisition deal, right up to the few years it takes to put the biggest infrastructure financing projects in place.

Markets: trading, sales and research

This side of the bank is also known as the public side of the bank. It's here that investment banks assist their clients with transactions in the public financial markets where a wide range of commodities, currencies and financial products can be bought and sold. Bankers here offer investment advice, practical assistance in executing trades on behalf of clients, and may also, representing the bank, trade with clients.

There are several main streams to the work on the bank's trading floor, and the bank's employees here are likely to specialise in one of the areas below. They're also likely to focus on particular industry sectors, or geographical regions.


A bank's traders are those who actually execute all the trades made at an investment bank. Traders will usually specialise in a particular kind of asset: a physical asset, such as oil; a type of financial product, such as bonds; or derivative products, such as options to buy a share at a certain date in the future. Some of their trades will be on behalf of clients, who might want to buy something they need, manage their risks, or make money through trading activity. Other trades might be with clients, for example, a corporate client might wish to purchase a large amount of a foreign currency from the bank. Finally, some trades will be done in order to protect the bank against market risks.

A trader will usually conduct many trades in one day. Requests from clients for trades usually come from a member of the sales team and traders will then provide a quote for the transaction the client wants to carry out based on their knowledge of the market. Once the client is happy with the quote, the trader will execute the trade.

Read the full trading department profile


The role of a salesperson at an investment bank, also known as a sales trader, a broker, or a dealer, is to function as the first point of contact at the bank for clients interested in using the bank's trading services. Salespeople will usually specialise in a particular industry or geographical region, for example, pharmaceuticals or Asian companies. They will use the reports produced by the bank's research teams, and other sources, to stay up-to-date with their area of expertise and to advise clients on what investments to buy and sell, drawing on their knowledge of their sector and of that particular client.

Sales people will get to know their clients well and will communicate with them regularly, spending the majority of each day on the phone to them, in the aim of generating trading orders. They'll also work closely with traders on formulating and managing trading strategies for the bank. In addition, they sometimes play a role in raising capital for the bank by marketing share or bond issues in which the bank is involved.


The role of the research department is to analyse data, form opinions and produce reports, which are used by the rest of the bank. Those in the research team, like traders and sales people, usually focus on one industry sector or geographical region. Some of the main users of research reports are sales people, who use them to advise their clients on potential investments. The work of the research team, however, will also be used by traders, those on the investment banking side of the bank as they research and analyse potential deals, and by clients.

An investment bank's research team working on a particular area will produce weekly and monthly reports as well as ad hoc updates when an event happens that affects the markets. Research teams may also produce reports in response to client requests. The data they use to produce their reports will be drawn from a wide range of sources, including publicly available corporate records and data sources such as those provided by Bloomberg and Reuters.

Read the full research department profile

How do these kinds of work bring in revenue for investment banks?

The main way in which investment banks make money from trading and related activity is through the commission that they charge for every trade they do, which is usually a percentage of the value of the trade.

Who are the key clients of this part of the bank?

Corporates: Large companies might come to investment banks' markets teams to buy supplies of a commodity they need, for advice on how to use the markets to protect themselves against risks their business faces, or even for advice on how to invest surplus cash they hold.

Funds: Funds clients, such as hedge funds and asset management firms, are major clients of investment banks' market teams, who offer them crucial advice and assistance in investing the very large sums of money they manage.

Individuals: Investment banks might occasionally assist high net worth individuals who wish to invest in the financial markets.

How long do deals here take?

Trades can be completed in a matter of seconds and anyone at an investment bank involved in trading is likely to see many go through the system in one day. However, it's important to note that every trade is followed up by a confirmation and settlement process, which may take another few hours, or even days, to complete.