Investment Banking

When you think of a bank, you probably think of an account, a card, and a loan for your car. Investment banking is something entirely different. Here, the clients aren’t private individuals, but large corporations, governments, and professional money managers. The bank helps them raise very large sums of money or buy and sell major companies. In return, it is paid fees, often a percentage of the sum involved. On a deal worth over a billion euros, that can amount to several million.

Why tech companies barely grow without investment banks

Almost every major technology company has needed an investment bank at some point. The classic moment is the IPO. This is when a company sells shares of itself to the public for the first time. Such shares are called stocks, and whoever owns them owns a piece of the company. Investment banks organize this sale, find buyers, and set the price together with the company.

The second major moment is the acquisition. When a corporation takes over a competitor or a young AI startup, an investment bank is almost always involved behind the scenes. It assesses what the target is worth and negotiates on behalf of its client. This is exactly why names like Goldman Sachs or Morgan Stanley appear so regularly in business news about acquisitions.

It’s also important that these banks help shape the tone of financial markets. Their analysts write reports on whether a stock appears too expensive or too cheap. These assessments move prices. A downgrade by a major bank can change a company’s value by billions in a single day.

The business divisions of an investment bank

The best-known division is called Mergers and Acquisitions, abbreviated M&A. This refers to the merging or buying up of companies. Here, the bank works like a very well-paid broker. It brings buyers and sellers together, examines the numbers, and guides the negotiation through to signing.

The second division raises money. This happens in two ways. Either the company sells new shares, in which case its owners give up part of their control. Or it borrows money through bonds, essentially IOUs with fixed interest that investors can buy. The investment bank finds the buyers and often takes on the risk of holding onto unsold securities itself.

Then there’s trading. Large investment banks constantly buy and sell securities, partly for clients, partly for their own account. This division brought several firms to the brink of collapse during the 2008 financial crisis. Since then, stricter rules govern how much risk a bank is allowed to take on in this area. Incidentally, investment banking should not be confused with wealth management, where a bank invests other people’s money for the long term instead of brokering deals.

Investment banks in AI news and everyday life

You’ll mostly encounter this term in headlines. When an AI company goes public or a chipmaker acquires a competitor, the accompanying banks are named in the report. Valuations like “the startup is worth ten billion” also often stem from such processes. These figures are estimates, not measured values.

It’s also interesting that investment banks themselves have become major users of technology. They use language models to analyze contracts and financial reports. Tasks that used to take entry-level employees entire nights are now partly automated. Several firms have therefore spoken openly about hiring fewer young employees in the future.

A common misconception is that investment banks mainly speculate with their own money. The largest and most stable part of their income comes from fees for advice and brokering deals. So they earn particularly well when a lot is happening: many IPOs, many acquisitions. In quiet years with high interest rates and few deals, however, their profits quickly collapse.