How does an investment bank make money?

Brokerage services

Investment banks often act as mediators and liaisons between buyers and sellers in different marketplaces. Normally, for this service an investment bank will charge a commission for specific trades it helps execute. These trades can be for extremely large companies and corporations, or more simple stock trades concerning smaller investors or individuals.

Underwriting services

Many investment banks also provide underwriting services. These services are for organizations that need to raise funds. This often happens in the scenario of initial public offerings (IPOs).

If an investment bank buys some stock in an IPO with a plan to market the stock to investors, there is a risk of losing money if the investment bank is unable to sell the stock at a higher price. So investment banks normally use a flat fee underwriting charge to cover any potential losses and also to generate revenue.

Mergers and Acquisitions

A merger and/or acquisition refers to either the combining of two companies into one business entity or the purchasing of one company by another with the goal of either ingesting the purchased company's business or buying them out for competitive alleviation.

Investment banks often charge fees to either, or both, of the companies involved in a merger or acquisition for advisory services. Mergers and acquisitions take a lot of consideration and deliberation for both companies involved, and can often take years before the transaction is done. Investment banks are often employed to help navigate the complex process.

Asset management

Investment banks also act as asset managers by advising and managing a client's investments. This includes things like stocks, bonds, mutual funds, EFTs, and other investments.

Their primary objective is to help a client increase their wealth by determining what investments are the best options for a particular client. They may also assist in asset allocation or choosing how to divide a client's investable assets into different asset classes. Investment banks are normally paid handsomely for these services.