What Is Investment Banking?
Investment banking differs substantially from retail banking. As its name implies, investment banking focuses on investing money in order to make a profit. Retail banking is about taking deposits from customers and loaning a portion of the those deposits out to other people and businesses. The nature of retail banking is very simple at heart. Investment banking on the other hand can be quite complex and span several dimensions in finance.
So what exactly is investment banking? To start, most investment banks do not take personal deposits such as that found in a retail bank. In fact, most investment banks will not have any branches staffed with tellers where you can make a deposit and take out cash. Investment banks typically will not have savings account where you can put away money and watch it accrue interest.
Instead investment banks will have financial advisors, portfolio managers and investors on behalf of the bank. If there are any branches to an investment bank they are often strictly for employees and do not generally interact with the public as retail banks do. You won’t find a checking account at an investment bank either.
So how do investment banks make money? They take funds and invest it directly into companies, bonds and commodities. For example investment banks will purchase companies outright and take full ownership of them. Or, they can buy a certain percentage of stock and became a primary shareholder by acquiring 51% or more of a certain company’s stock for example. Investing in bonds is self explanatory. Just as private investors do on their own, investment banks will buy and sell large amounts of commodities on the daily market in hopes of turning a profit. There is some overlap between retail banks and investment banks. Both will make personal, business and home loans to people and earn money through interest and fees.
An Example Of A Successful Investment Banking Firm
There are just about as many if not more investment banks than retail banks in the world. One good example of a successful investment bank is Madison Street Capital. This firm is based in Chicago, Illinois. They are a good example of a medium sized investment banking firm. Not only due they buy and sell stock, commodities and make business loans, they also act as facilitators during mergers and acquisitions.
Madison Street Capital invests in and works with companies not only at home in the United States but abroad as well. This is because investments through the banking system can be made just as easily abroad as at home. Some firms like Madison Street Capital can specialize in helping middle sizes firms gain a foothold in other countries as they try to expand their products abroad.