While we all have a general idea of what a bank is, many persons are clueless when it comes to investment banking. Before we delve into the discussion about the types of investment banks, let us gather a basic understanding of the definition and functions of investment banks.
An investment bank is a type of financial institution that helps individuals, businesses, and government institutions to obtain capital by both underwriting and functioning as the client’s broker in the issuance of securities. This type of bank may also benefit companies engaged in business mergers and asset purchases such as the acquisition of businesses, buildings, private estates and land parcels. Investment banks also provide supplementary services such as market making, equity securities and trading of derivatives as well as currencies, fixed income instruments, and commodities. More importantly, investment banks do not facilitate deposits as opposed to commercial and retail banks. There are many instances however, where investment banks are part of other major financial institutions, like a chief commercial bank.
There are two major types of investment banks based on their function. This might be more relevantly referred to as branches of operation in investment banking. The first is the ‘sell side’ that includes functions such as trading securities and includes the facilitation of transactions through market-making, and the promotion and marketing of securities through research and underwriting. On the other hand, the ‘buy side’ refers to institutions that give guidance and advice as it pertains to buying investment services. Common entities on the buy side include insurance companies, hedge funds, unit trusts, mutual funds and private equity funds.
Investment banks are further divided by their private and public functions. This creates a boundary, preventing information crossing between the two sectors. This gives rise to two distinct types of investment banks which includes; boutique or private investment banks and full-service or bulge bracket investment banks.
Private or boutique investment banks are concerned with private and confidential information and transactions that might not be revealed to the public. They are usually smaller banking entities that specialize in one or more areas of investment products. Others in this sector focus their services on one type or one specific group of industries. These private entities carry out a variety of functions. Some may act as investment advisors while others specialize in the trade of certain assets and commodities. There are also those that offer services to specific social groups and industries. Examples of private investment banks include; Almeida Capital, Atlantic-Pacific Capital, J.P. Morgan Cazenove, Triago, China International Capital Corporation and CITIC Securities.
The more public, full-service or bulge bracket investment banks enlist a wider variety of market activities that include research, underwriting, mergers and acquisitions, trading, merchant banking, investment management and securities trading services. These bulge bracket banks are enormous investment institutions that cover all or most industries. They serve a wide variety of client types and offer most if not all possible types of investment banking services in their portfolio. Major institutions that fall under this umbrella today are Bank of America Merrill Lynch, Barclays Capital, Citigroup, JPMorgan Chase and Morgan Stanley.