What is investment banking?

Investment banking is, at its core, a financial advisory business. Companies, governments, and investors hire banks to help them raise money and to buy, sell, or restructure businesses. The bank is the expert intermediary in the room, the one who has done the deal a hundred times before and gets paid to make sure it goes well.

If you strip away the jargon, an investment bank does three things: it raises capital, it advises on transactions, and it provides judgment about what something is worth and how a deal should be structured.

It is not the bank you keep your money in. The most common mix-up, and one you can get asked directly, is between an investment bank and a commercial bank. A commercial bank takes deposits and lends them back out, and it earns the spread between what it pays savers and what it charges borrowers. An investment bank takes no deposits. It sells advice and access, and it gets paid a fee when a deal closes.

That difference shapes everything downstream. A commercial bank manages credit risk on its own balance sheet over years. An investment bank gets a transaction done in months, and its exposure is reputational as much as financial. The two were legally walled off in the United States by Glass-Steagall from 1933 until its repeal in 1999, and although the wall is gone, the businesses still think, hire, and pay very differently. Several of the names you know, JPMorgan and Citi among them, run both under one roof.

Why companies pay for it

A company sells software, or makes engines, or runs hospitals. It does not employ a standing team of people who know how to sell a $4bn division to a strategic acquirer, or how to price a debut bond offering across hundreds of institutional investors. That expertise is episodic and expensive to keep in-house, so they rent it.

How a bank is organized

Most banks split the work two ways, and you'll be asked which you're interested in:

• Coverage (industry) groups own the client relationship for a sector: technology, healthcare, financial institutions, and so on. They know the companies, the management teams, and the strategic landscape.
• Product groups are deal specialists. M&A advises companies on buying and selling other companies, equity capital markets (ECM) raises money by selling stock, and debt capital markets (DCM) raises it by issuing bonds. Restructuring and leveraged finance round out the group. They bring the technical execution.

On a live deal, a coverage banker and a product banker staff the same engagement together: one brings the relationship, the other brings the mechanics.

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The bank as a whole sits on the sell-side: it advises companies and sells securities to investors. The buy-side, the private equity firms and hedge funds and asset managers, is who ends up owning those securities. Knowing which side of the table you're on matters, and it's a question you'll get asked.