Investment banking Q&A: how do investment banks make money?

By Indeed Editorial Team

Updated 6 October 2022

Published 30 November 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

In a career in investment banking, you help corporations and investors handle their financial work. Some of your duties may involve providing stock advice or trading securities. Reviewing answers to common questions about investment banking may help you to develop relevant skills and increase your chances of succeeding in the field. In this article, we answer 'how do investment banks make money?' and provide answers to other questions that can help you to pursue a career in investment banking.

How do investment banks make money?

Knowing the answer to the question 'how do investment banks make money?' may be helpful for you if you're thinking about working in banking and finances. The two categories that best describe how investment banks make money include financial advice and trading securities. Investment banks underwrite these securities, buy them and then sell them for a profit.

Investment banks often make money by connecting and creating trading opportunities for buyers and sellers from different markets. Those banks then charge a commission on each trade that the two parties manage to finalise. The commission may depend on the size and prestige of the bank, which means that bigger investment banks usually earn more for their work.

Related: How much does an investment banker make?

What is an investment bank?

An investment bank is a bank that focuses on purchasing large holdings of stock shares and reselling them for a profit. It's a financial services company that provides financial advice to individuals, corporations or even governments. Investment banks help their clients manage their assets and meet their financial challenges or goals. They usually offer research, trading and sales, wealth and asset management, mergers or hedging.

What are some common investment bank products?

Many investment banks focus on both providing services to clients and making money by reselling assets. Here are some common products that banks of this type traditionally offer:

Portfolio and asset management

Banks that offer portfolio and asset management take care of building and selecting investments on behalf of investors, who are those banks' clients. By providing this service, they help investors increase their risk tolerance and meet their long-term financial goals. Depending on the type of asset management, banks may also focus on actively buying and selling stock to generate profit for their clients. They then earn a commission which is usually a percentage of that client's return.

Related: How to get into investment banking

Equity research and advising

While providing this service, investment bankers research and analyse the market and provide advice to clients, including corporations and governments. They help those clients make the right decisions regarding their stock market investments. Typically, bankers provide this service for a fee.

Mergers and acquisitions (M&A)

Merging is a process in which two or more organisations come together to create a new organisation. Similarly, acquisition takes place when one entity takes over the other. M&A are all transactions that lead to transferring the ownership of companies or consolidating them with other entities. In M&A investment banking, banks help investors go through these processes and finalise the transactions.

Sales and trading (S&T)

S&T is one of the primary front-office divisions of major investment banks. Investment bankers, or traders, who work in the sales and trading division focus on stocks, bonds and derivatives. They pitch ideas to clients and trade securities and derivatives by selling them for a profit.

Related: What are the different divisions in investment banking?

Underwriting

Financial underwriting is the process of verifying someone's income, assets, debt and property details. This type of service that investment banks provide refers to a situation when a bank accepts different kinds of financial risk for a fee. They do this to make sure their clients can take a loan or buy insurance.

How do investment banks compete with each other?

Investment banking is a competitive and specialised field in which bankers compete with each other to attract the wealthiest clients. Banks compete through fees, pricing accuracy, debt offering capabilities or recommendations. Often an important aspect that makes those banks successful is their reputation. Competition in investment banking works almost exactly like in other companies. One of the most important factors is that it promotes innovation and change, which makes banks come up with new solutions and products to offer.

Related: Investment banking Q&A: how do investment banks make money?

What's the difference between commercial and investment banking?

Understanding the difference between commercial and investment banking may help you choose a career that best aligns with your skills, strengths and interests. Both commercial and investment banking are two branches of the financial industry, but they operate in different ways. The term commercial banking typically refers to standard banking services and products that most people use to obtain smaller loans, make cash deposits or withdraw money. Investment banking refers to a financial sector that mostly provides services to businesses or investors who handle large projects and help them achieve their financial goals.

Related:

  • How to become a business banker (with definition and skills)

  • Commercial banking vs. investment banking differences

What are some must-have skills in investment banking?

If you aspire to work in investment banking or the financial sector, it's important that you know which skills and abilities to develop. Here are some things you may focus on to increase your chances of exploring interesting job opportunities in banking:

Preparing transaction documentation

On a daily basis, investment bankers prepare, process and analyse transaction documents. This also involves confidentiality agreements, confidential information memorandum (CIM) or term sheets. To learn how to work with these types of documents, you may start by reviewing some free online templates and comparing them to identify key elements of important transaction documentation.

Related: Comparing commercial banking vs investment banking

Conducting business valuations

Investment bankers use different valuation methods to estimate the worth of their client's assets. They usually use three main types of valuation methods, including discounted cash flow (DCF) analysis, comparable company analysis and precedent transactions. Learning how to evaluate businesses may be a lengthy process. You can begin by engaging in self-learning activities, for example, by studying some popular equity valuation books.

Knowledge of financial modelling

Financial modelling is a key skill in investment banking. It's a concept that involves building an abstract representation of a real-world financial situation. It allows you to perform various financial modelling activities, such as building DCF models. By creating those models, you may predict how a financial asset or portfolio could perform.

Related: What is financial modelling for businesses? (with examples)

Negotiating skills

Negotiating skills are important for all professionals working in investment banking. You may use them to help clients and investors make wise financial decisions and negotiate a better commission or fee for yourself. It's also critical to use them in situations when it's especially difficult to reach a compromise that satisfies all parties. To improve your negotiating skills, it's important that you focus on the five core aspects of negotiating:

  • attention to detail

  • flexibility

  • empathy

  • problem-solving

  • persuasiveness

Related: Common Investment Banking Interview Questions

What are some interesting roles in investment banking?

Understanding your options is a great way to make sure you pursue a career in a field that you truly have an interest in. Here are some interesting jobs in investment banking that you may consider for yourself:

1. Trade assistant

National average salary: £21,615 per year

Primary duties: Trade assistants provide assistance to more experienced traders and investment bankers. By observing and supporting their supervisors, they learn how to trade assets on behalf of clients and manage risks. They provide general assistance to their supervisor and often perform basic administrative tasks. It's usually an entry-level position, which may be perfect for a recent finance graduate or someone who wants to go into investment banking from commercial banking.

Related: How to write an investment banking CV (with example)

2. Investment risk analyst

National average salary: £44,756 per year

Primary duties: Investment risk analysts stay up-to-date with changes in stock prices and markets. They use this knowledge to assess investment risks and advise clients or their employers where to invest. Other duties of analysts often involve examining a business's portfolios, including overseas investments, to determine which are worth keeping.

Related: How to become an investment analyst (with steps and skills)

3. Investment manager

National average salary: £54,688 per year

Primary duties: An investment manager's primary concern is managing their clients' portfolios by quickly reacting to market changes. Many investment managers work closely with traders and analysts to come up with the best strategies for achieving their clients' financial goals. Succeeding in this role requires analytical skills, mathematical abilities and excellent customer service and negotiating skills.

Salary figures reflect data listed on Indeed Salaries at the time of writing. Salaries may vary depending on the hiring organisation and a candidate's experience, academic background and location.

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