Investment banking facts for kids

Investment banking is a special part of the financial world. It helps companies, governments, and even some very rich people with big money decisions. Think of it like a financial advisor for huge projects.

These banks help businesses raise money by selling shares (parts of the company) or bonds (loans) to investors. They also help companies when they want to merge with another company or buy one. This is called mergers and acquisitions (M&A).

Unlike regular banks where you keep your savings, investment banks do not take deposits from everyday people. They work with large amounts of money and big organizations.

Investment banking activities are split into two main groups:

• "Sell side" means helping to create and sell financial products, like new shares or bonds. It also includes trading these products.
• "Buy side" means giving advice to big investors, like mutual funds or hedge funds, who want to buy financial products.

Investment banks have rules to keep private information separate from public information. This is like a "Chinese wall" inside the bank. It stops people who know secret company plans from using that information unfairly.

History of Investment Banking

How Investment Banking Started

The idea of selling parts of a company to the public started a long time ago. The Dutch East India Company was one of the first. In the 1600s, it sold both bonds and shares to the public. This made it the first company to be listed on a stock exchange.

Changes Over Time

Over the years, investment banking has grown a lot. It started with helping companies sell new shares and bonds. It also helped with buying and selling companies. Now, investment banks offer many more services. These include:

• Helping companies with mergers and acquisitions.
• Managing money for big investors.
• Trading different financial products.

In the United States, there used to be a law called the Glass–Steagall Act (from 1933). It kept investment banks separate from regular banks that take deposits. But this law was removed in 1999. After that, many large regular banks started their own investment banking divisions. This led to "universal banks" that offer many different services.

After the financial crisis of 2007–08 (which we'll talk about later), new rules were made. These rules, like the Volcker Rule, put some limits back on what investment banks can do, especially when trading with their own money.

How Investment Banks Are Organized

Main Activities of Investment Banks

Investment banks have different teams that work together. These are often called the "front office," "middle office," and "back office."

Investment banks help companies that want to sell shares or bonds. They also help investors who want to buy these. Investment bankers give advice on when and how to sell new shares or bonds. This is a very important job for their reputation.

Front Office: Making Money

The front office teams are the ones that bring in money for the bank. There are two main parts:

• Investment Banking: This team advises companies on mergers and acquisitions. They also help companies raise money in many ways.
• Markets: This part includes "sales and trading" and "research."

Helping Companies Raise Money

This part of investment banking helps companies get the money they need. They also advise on mergers and acquisitions (M&A). This means helping one company buy another, or two companies join together.

Here are some things this team does:

• Advising on buying or selling private companies.
• Helping public companies merge or take over others.
• Helping companies sell new shares to the public for the first time (called an initial public offering or IPO).
• Finding money for big projects or new businesses.
• Helping companies change how their debts are set up.

The investment banking division (IBD) is often split into groups that focus on specific industries, like healthcare or technology. Other groups focus on specific financial products, like mergers or debt.

Sales and Trading: Buying and Selling

This team's main job is to buy and sell financial products for the bank and its clients.

• Sales people talk to big investors. They suggest trading ideas and take orders from clients. They then send these orders to the trading rooms.
• Traders buy and sell financial products. They aim to make money on each trade.
• Structuring involves creating complex financial products, especially derivatives. These are often custom-made for clients.
• Strategists give advice on what might happen in different markets. They help the bank and its clients decide what to do.

Banks also trade with their own money, which is called proprietary trading. This involves taking risks to make a profit.

Research: Giving Advice

The securities research team studies companies and writes reports about them. These reports often say if a stock is a "buy," "hold," or "sell." They also research things like fixed income (bonds) and the overall economy.

Research helps traders, sales teams, and other bankers. It also gives investment advice to outside clients. This helps bring in business for the bank.

There can be a conflict here. The research team might want to give a good rating to a company to help the bank get more business from that company. Rules are in place to try and prevent this.

Middle Office: Keeping Things Safe

This part of the bank handles important internal jobs. These include managing the bank's money, checking its risks, and planning its overall strategy.

Risk Management: Checking Risks

Risk management teams look at the risks the bank takes when it makes deals or trades. They check things like:

• Market risk: How much the value of investments might change because of market movements.
• Credit risk: The risk that a borrower might not pay back a loan.

These teams make sure the bank doesn't take on too much risk. They help control how much risk different parts of the bank can take.

Back Office: Making Sure Things Work

The back office checks all the trades that have happened. They make sure everything is correct and that money and securities are transferred properly. It's a very important part of the bank, even though it doesn't directly make money.

Technology: Powering the Bank

Every big investment bank has a lot of computer software. The technology team creates and supports this software. Technology is very important now, as many trades are done electronically using complex computer programs.

Other Services Investment Banks Offer

• Global transaction banking: This helps big organizations manage their cash and securities.
• Investment management: This is where professionals manage money for investors. They invest in stocks, bonds, and other assets to meet specific goals. This can be for large companies or very wealthy individuals.
• Merchant banking: This is like a very personal kind of banking. Merchant banks invest their own money into companies in exchange for a share of ownership, instead of just giving loans. They also offer advice on how to run the business.

Who Are the Big Players?

The investment banking world has different levels:

• The Bulge Bracket includes the biggest, most famous banks.
• The Middle Market banks are mid-sized.
• Boutique banks are smaller and specialize in certain areas.

Many of the world's largest investment banks are based in New York City. Other important financial centers include London, Frankfurt, Hong Kong, Singapore, and Tokyo.

Top Investment Banks

Here are some of the top investment banks based on their M&A advisory fees in 2020:

Rank	Company	Ticker	Fees ($bn)
1.	Goldman Sachs	GS	287.1
2.	Morgan Stanley	MS	252.2
3.	JPMorgan	JPM	208.1
4.	Bank of America Merrill Lynch	BAC	169.9
5.	Rothschild & Co	ROTH	94.6
6.	Citi	C	91.8
7.	Evercore	EVR	90.3
8.	Credit Suisse	CS	90.2
9.	Barclays	BCS	71.7
10.	UBS	UBS	65.9

The Financial Crisis of 2007–2008

The financial crisis of 2007–2008 was a very difficult time for the economy. Several big investment banks faced huge problems. For example, Lehman Brothers, a very large investment bank, went bankrupt. Other banks, like Merrill Lynch and Bear Stearns, had to be sold quickly to bigger banks to save them.

Governments around the world stepped in to help the financial industry. In the U.S., the government provided support to banks to help stabilize the economy. This led to new rules and changes in how investment banks operate. For example, banks like Goldman Sachs and Morgan Stanley changed how they were set up so they could get government help.

The crisis made many people question how investment banks were working. It led to more rules to try and prevent similar problems in the future.

Why Investment Banking Faces Criticism

Investment banking has faced criticism for several reasons:

Conflicts of Interest

Sometimes, different parts of an investment bank might have different goals. This can create a "conflict of interest." For example, the team that advises a company might want to sell its shares at a high price. But the team that trades for the bank might want to buy those shares at a low price.

To prevent this, rules require banks to have a "Chinese wall." This means keeping information separate between different teams. However, some critics say this wall doesn't always work perfectly.

There have been cases where research analysts gave positive ratings to a company's stock. This was sometimes done to get more business for the bank from that company. Laws have been made to stop these kinds of actions.

High Pay Packages

Another common criticism is the very large amounts of money paid to people who work in investment banking. During the financial crisis, many people were upset that executives received huge bonuses, even when their banks were struggling or needed government help.

Images for kids

• 

  Many of the largest investment banks, including JPMorgan Chase, belong to the Bulge Bracket.

See also

In Spanish: Banca de inversión para niños

• Alternative investment
• Boutique investment bank
• Devolvement
• Independent advisory firm
• Investment Banking Exam
• List of investment banks
• Traditional investments