Investment Banking

Investment Banking, branch of finance concerned with the underwriting, distribution, and maintenance of markets in securities issued by business firms and public agencies. Investment bankers are primarily merchants of securities; they perform three basic economic functions:

(1.) provide capital for corporations and local governments by underwriting and distributing new issues of securities;

(2.) maintain markets in securities by trading and executing orders in secondary market transactions; and

(3.) provide advice on the issuance, purchase, and sale of securities, and on other financial matters. In contrast to commercial banks, whose chief functions are to accept deposits and grant short-term loans to businesses and consumers, investment bankers engage primarily in long-term financing.

In addition to departments handling the purchase and resale of new issues, an investment-banking house typically has a trading department, a brokerage department, and a research or statistical department.

The trading department buys and sells securities when profitable opportunities arise. Sometimes it may have to buy back securities it is marketing in order to prevent a decline in their market price.

The brokerage department buys and sells securities, at a commission, for the accounts of other investors. The research department supplies the firm and its customers with information about securities.

An important segment of investment-banking operations is carried on by government-bond dealers. A few dozen large investment houses and commercial banks, most of them headquartered in New York City, handle the bulk of trading in U.S. government securities.