Investment Banker

Last week Goldman Sachs (GS) reported record earnings that were up 93% from the previous year. The news media really picked up on the fact that this translated into some incredible bonuses for the employees, including the amazing fact that the average bonus would be around $600,000. As a major player on Wall Street, this good earnings news probably helped the DOW to close at record levels for the week. Goldman Sachs main business is what is known as ‘Investment Banking’. But this is not banking as most people look at it. Just exactly what is investment banking?

Investment bankers are not really bankers at all. The fact that the word banker appears in the name is partially responsible for the false impression that they are like most banks. Investment bankers are not permitted to accept deposits from anyone. They do not provide checking accounts or savings accounts for customers. An investment banker is simply a securities firm that specializes in helping other business firms (generally corporations) obtain the money they need on the best terms possible.

When it comes to the actual process of having stock or bonds issued, corporations approach an investment banking firm and will ask it to act as advisor and distributor. When the investment banking firm assists a corporation in the distribution of stocks or bonds, they are acting as an underwriter. So the investment banker is the middle man in the market between corporations and investors.

The investment bankers, like a stock brokerage firms, receive their money through fees and the ‘spread’ between the public price stocks are being offered at and the price that the firm buys the stock at. These fees are normally set before an offering. There are also usually commission fees that go out to brokers that are designed in such a way that the brokers are encouraged to sell new stock offerings to their clients.

Bottom Line – In general, when the investment banking firms are doing well, the stock market will usually be on the bullish side of things, as we are seeing now with the Goldman Sachs earnings. When corporations are optimistic about the future, they tend to go to the public markets more for additional capital for expansion. So, these earning numbers from Goldman’s are another reinforcement of the healthy nature of the current market.