Investment banks are curious structures. These are not the banks you would generally see on the streets (those are commercial banks), but they are certainly not banks that simply invest money either. To understand what they are, let us delve into what they do and their history.

So, what do investment banks do?

Generally, we can classify what they do into two categories:

• Primary market activity. This is where investment banks underwrite and distribute shares and bonds. For example, when you are told Goldman Sachs advised on an Initial Public Offering (IPO), it was actually participating in primary market activity.
• Secondary market activity. This is what the buying and selling of securities once they have been issued (via primary market activity) are called. This includes activities such as market making or proprietary trading (or more generally as trading).

But in recent years, investment banks have become more and more involved in principal investment. This is where the bank allocates its own money/capital to buy stakes in businesses. This is similar to private equity, where private investors (which are usually institutions) are the ones that commit capital to buy businesses.

Now, how about the history of investment banks?

The United States is credited with the birth of investment banks, and the largest investment banks today are still US-based.