How Investment Banks Make Money
Investment banks are businesses that earn revenue by providing services like client advice, trading securities and underwriting policies to clients as well as back office functions like compliance and risk management.
Investment banks earn their profits from providing high-priced services that fetch commissions that often run into millions or even billions of dollars, unlike high street banks which take deposits and lend out those deposits as loans to borrowers.
Financial advice
Investment bankers differ from retail banks in that they make money through fees and commissions rather than by taking deposits from savers and lending them out to borrowers. Investment bankers earn their revenue through providing financial advice to companies, governments and private clients; as well as servicing hedge funds and fund managers.
Investment banks also generate revenue by underwriting securities for public investors or by acting as market makers and facilitating trading activities.
Wealth management divisions of investment banks typically earn fees based on the assets under their management, which can be quite substantial at larger banks. They also charge consulting fees which vary based on scope and can range anywhere between fixed fees or percentages of deal value.
Trading securities
Investment banks make money through trading securities such as stocks, bonds and other assets. They also serve as asset managers by providing investment advice to clients – for instance helping select an optimal mix of assets or helping arrange mergers and acquisitions. Investment banks earn revenue through underwriting fees as well as research activities which generates additional income streams for them.
Investment banks generate revenue in another way by lending to businesses. This practice, known as debt underwriting, allows them to profit by selling pieces of the loan package as investments – charging an enormously lucrative fee that can span millions of dollars for this service.
Investment banks also generate revenue through the sale of research reports to companies and individuals willing to pay hefty fees for them. Investment bankers receive compensation for the hard work involved in building models and decks over and over, making them fast and skilled at what they do.
Underwriting
Investment banks must generate revenue to survive as any business. Their sources of revenue include financial advice, underwriting securities and brokerage services – though how these revenues are generated differs considerably from high street banks that take deposits from savers and lend it out with higher interest rates to borrowers.
One effective means is through underwriting, which involves helping private companies transition to publicly-traded status through initial public offerings (IPOs). Investment banks charge fees for this service while receiving performance-based bonuses based on an IPO’s aftermarket results.
Investment banks generate revenue through the sale of research reports about companies and their products; fees paid for these research reports by clients of these banks. Many investment banks also engage in market-making activities as an important source of trading and sales revenues; they buy, temporarily hold and then sell securities on behalf of clients to earn commissions for commission.
Portfolio and asset management
Investment banks make their money through essential services to the global economy. They advise businesses and governments on mergers, acquisitions, debt issuances, investments for clients and manage them on behalf of clients; in doing so, fees and commissions from these investments provide profits for the bank itself.
Investment banks also make money through selling debt and equity shares to companies and investors, known as underwriting. Underwriting fees typically are calculated based on a percentage of the value of securities being sold; additionally, underwriting fees may also apply when underwriting an IPO (initial public offering).
Investment banks generate revenue not only through trading and underwriting but also research. Investment banks publish reports that are valuable to their clients at premium prices; making the research division of investment banks an extremely lucrative business. Investment banks can charge these high fees because they possess access to market information not available elsewhere.
