Investment banking, a specialized subset of banking, manages large, intricate financial transactions such as mergers, acquisitions, and initial public offerings (IPOs) underwriting. With a gamut of activities extending from underwriting new securities issuance to facilitating corporate reorganization, investment banks serve as an invaluable nexus in the world of high finance.

Investment banks primarily focus on raising capital for companies, governments, and other entities. For this purpose, they underwrite new debt and equity securities for all types of corporations, facilitating the issuance of new securities for a variety of institutions, from corporations to municipalities. A pivotal role they play is managing a corporation's IPO, a transformative event in a company's journey.

Investment banks, often regarded as the stalwarts of the financial industry, are instrumental in facilitating mergers, acquisitions, and reorganizations. Serving as intermediaries, they underwrite new security issues and help distribute them, creating a fluid market for these new securities.

Investment banking activities span beyond just traditional banking. Investment banks operate hedge funds, invest and speculate in ways that most institutions can't, and even trade in their own accounts. They buy large blocks of stocks and bonds for new issues and distribute them at a premium. Their extensive reach into international markets allows them to engage in swaps and capitalize on arbitrage opportunities, often through high-frequency trading (HFT).

The advisory role of investment banks is a crucial aspect of their service offering. With their fingers firmly on the pulse of the current investment climate, they provide invaluable advice and guidance to issuers regarding the offering and placement of stocks. Thus, they serve as consultants to a broad spectrum of businesses and other financial institutions, helping their clients navigate the often tumultuous seas of high finance.

Interestingly, the U.S. legally segregated investment banks from other types of commercial banks from 1933 to 1999 through the Glass-Steagall Act. This separation was primarily to avoid speculation becoming interwoven with the banking industry, thus maintaining financial stability. However, the Act was repealed in 1999, leading some critics to link the 2007-2008 financial crash to this deregulation.

Although the Glass-Steagall Act's future remains uncertain, the Volcker Rule—part of the Dodd-Frank Act of 2010—does impose a boundary between the investment banking and commercial banking sides. This legislation aims to mitigate risks associated with speculative trading, demonstrating an ongoing concern about the potential dangers of excessive speculation in the banking industry.

Investment banking is a crucial facet of our global financial infrastructure, with their array of services being indispensable for corporations, governments, and other entities to raise capital. From underwriting securities to facilitating mergers and reorganizations, investment banks continue to play a central role in the financial landscape, shaping economic trajectories on a global scale.

Summary

Investment banking activity is different than traditional banking. Investment banks often serve as intermediaries that underwrite a new issue of stock and help to distribute it.

They also trade in their own accounts, run hedge funds, and generally invest and speculate in ways that most institutions can’t. Investment banks can assist with new issues of stocks and bonds, purchasing large blocks of them to distribute at a premium.

They engage in swaps in international markets and benefit from arbitrage opportunities, often through high frequency trading (HFT). They manage money and serve as consultants to large numbers of business and other financial institutions.

They take large positions that might be too risky for other institutional investors. They also might assist with mergers and acquisitions, serve as market makers creating liquidity in markets.

The Glass-Steagall Act of 1932-33 separated investment banking from commercial banking, but it was ultimately repealed in 1999. Some blamed the 2007-2008 crash on the repeal, claiming that there was too much speculation interwoven with the banking industry.

As of 2016 it is unknown if Glass-Steagall will be reinstated, but the Volcker Rule, part of the Dodd-Frank Act of 2010, does put a partition between the investment banking side and the commercial banking side.

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