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Investment Banking Explained: Key Functions, How It Works, and Why It Matters

Investment Banking Explained: Key Functions, How It Works, and Why It Matters

Published:
2025-07-10 16:54:01
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Investment banking is the powerhouse behind major financial transactions, from IPOs to mega-mergers. This DEEP dive explores what investment bankers actually do, how they make money, and why they’re different from your neighborhood bank. Packed with real-world examples like Zomato’s IPO and the HDFC merger, we’ll break down complex Wall Street mechanics into plain English – no finance degree required.

What Exactly Is Investment Banking?

Imagine financial matchmakers with billion-dollar Rolodexes – that’s investment banking in a nutshell. These institutions don’t handle your checking account; they orchestrate high-stakes deals between corporations, governments, and deep-pocketed investors. The BTCC team notes that while commercial banks focus on everyday banking, investment banks specialize in:

  • Turning startups into publicly traded companies (like Airbnb’s 2020 IPO)
  • Engineering corporate marriages (Disney-Fox’s $71B merger)
  • Restructuring failing businesses (General Motors’ 2009 bankruptcy overhaul)
  • Creating complex financial instruments (mortgage-backed securities)
  • Advising governments on debt management (US Treasury bond auctions)

Source: TradingView data shows the top 5 investment banks (Goldman Sachs, JPMorgan, etc.) advised on over $1 trillion in deals annually pre-2023.

The 5 Core Functions of Investment Banks

These financial architects wear multiple hardhats:

FunctionReal-World ExampleRevenue Source
UnderwritingSnowflake’s $3.4B 2020 IPO7% of capital raised
M&A AdvisoryMicrosoft-Activision $69B deal1-2% of deal value
Sales & TradingTesla stock volatility playsBid-ask spreads
Asset ManagementBlackRock’s $10T portfolios1% AUM fees
ResearchCathie Wood’s ARK reportsPrime brokerage ties

Source: CoinGlass data reveals M&A fees alone topped $100B globally in 2022.

Inside the Investment Banking Machine

Here’s how the sausage gets made:

  1. Capital Raising: When Rivian needed cash, bankers structured its $13.7B 2021 IPO (then watched shares drop 80% – oops).
  2. M&A Dance: The Salesforce-Slack $27.7B deal involved 200 bankers negotiating for months.
  3. Market Making: Citadel Securities profits from microscopic price differences in meme stock trades.
  4. Restructuring:

Investment Banking vs Commercial Banking: The Ultimate Showdown

These financial siblings couldn’t be more different:

  • Risk Appetite: While Chase Bank worries about your mortgage payment, Morgan Stanley bets billions on speculative trades.
  • Client Base: Your local branch serves teachers and plumbers; investment bankers schmooze Fortune 500 CEOs.
  • Regulation: Post-2008, the Volcker Rule clipped banks’ proprietary trading wings.

Source: FDIC data shows commercial banks hold $23T in deposits vs. $5T in investment bank assets.

How Investment Banks Print Money

The profit playbook includes:

  • Underwriting Fees: 5-7% for IPOs (more if risky like WeWork’s failed attempt)
  • Success Fees: $50M+ paydays for closing mega-deals
  • Proprietary Trading: Goldman’s “Big Short” against mortgage markets

This article does not constitute investment advice.

Q&A: Investment Banking Demystified

What’s the difference between buy-side and sell-side?

The sell-side (like Goldman Sachs) creates investment opportunities, while the buy-side (like BlackRock) evaluates and purchases them. It’s like chefs vs. food critics.

Do investment banks take deposits?

Nope – that’s commercial banking. Investment banks raise capital through securities issuance and advisory services.

How did the 2008 crisis change investment banking?

Dodd-Frank regulations forced banks to spin off risky trading desks and increase capital cushions.

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