The terms “investment bank” and “merchant bank” are often used interchangeably, although they have different origins (investment banks in the US and merchant banks in the UK).
Unlike retail banks, whose customers are usually individuals or businesses, investment bank customers are usually corporations, governments and other banks. Broadly speaking, investment banking can be divided into four overlapping categories: financing, market trading, advisory services and propriety activities.
Financing (helping companies or governments to raise money) can be done in a number of ways, the most common being the underwriting of bonds or shares. Market trading refers to the buying and selling of shares and bonds that have been issued for the first time. Investment banks provide advisory services to companies, governments, institutional investors and wealthy individuals.
Most of the above describes services that banks provide to their clients. Generally when transactions are made, this is with clients’ money on clients’ behalf. Most of the profit – minus fees and commission, which can be considerable – goes to the client. A bank’s proprietary activities are different because the bank is dealing with its own money, solely with the intention of making a profit on its own account. While traditionally banks’ proprietary activities accounted for a relatively small proportion of their profits, this has increased in recent years.
Unless you own a large company or run an investment fund, you are unlikely to have much to do with an investment bank. This does not mean that investment banks are irrelevant to your desire to make ethical banking choices. In the UK, most retail banks also have investment wings. You might therefore want to know who a bank helps through its investment wing before deciding to use its retail wing. For example, most of the well-known banks in the UK provide advice and underwriting services to arms companies.