What is an investment bank?

What does an investment bank do?

An investment bank is a financial institution that helps governments, corporations and other large organisations raise capital, execute complex financial transactions, and navigate markets. Unlike a retail bank, which takes deposits and offers personal current accounts and mortgages, an investment bank's primary clients are institutional: companies preparing for an IPO, governments issuing bonds, or corporations looking to merge with or acquire another business.

Investment banks perform a range of functions that sit between companies with capital needs and the markets and investors that can meet them. Their core activities typically fall into several areas:

Some of the world's largest banks are universal banks, meaning they combine retail and commercial banking operations with investment banking under one roof. Others, such as Goldman Sachs, operate primarily in the investment banking and markets space. Many global ETFs focused on the financial sector include investment banking stocks as significant holdings, reflecting their scale within global indices.

Source: eFinancialCareers

How do investment banks make money?

Investment banks generate revenue from several distinct sources, which is one reason they are often seen as well-diversified businesses across market cycles:

1. Advisory fees

Charged as a percentage of deal value for M&A and other strategic transactions. These fees can be substantial on large deals but are lumpy and hard to predict.

2. Underwriting fees

Earned when helping a company or government issue new equity or debt securities. The bank takes a fee (spread) for distributing the securities to investors.

3. Trading revenue

From buying and selling securities on behalf of clients (agency trading) or for the bank's own account (principal trading). This can include equities, bonds, currencies, commodities and derivatives.

4. Net interest income

Earned on the difference between interest paid on deposits and charged on loans, most relevant for banks with significant commercial banking operations.

5. Asset management fees

Charged as a percentage of assets under management (AUM) for managing investment portfolios. This is a recurring, more predictable revenue stream than advisory or trading.

6. Prime brokerage

Fees charged to hedge funds for services including leverage, securities lending, clearing and custody.

The mix of these revenue streams varies significantly between banks. Goldman Sachs and Morgan Stanley have historically been more reliant on markets and advisory revenue, while JPMorgan Chase benefits from its large consumer banking operation alongside its investment bank. Investors considering financial sector ETFs or individual bank stocks should understand which revenue mix they are getting exposure to.

What is the 'bulge bracket'?

The term bulge bracket refers to the largest and most prestigious global investment banks, so named because their names would 'bulge' beyond the column in tombstone advertisements announcing major deals.

The bulge bracket is generally considered to include JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America, Citigroup and Barclays. Deutsche Bank and UBS are European peers that operate at a similar scale in some markets. These firms typically lead the largest and most complex global transactions and compete for the same mandates and talent.

Per eFinancialCareers, by total investment banking revenues the top four are JPMorgan, Goldman Sachs, Citigroup and Bank of America (with Morgan Stanley typically fifth but excluded from that analysis as the source of the estimates).

Investment banking stocks to watch

The following profiles cover five of the most widely traded investment banking stocks, all available through us. All financial data is from the most recently published full-year results.

1. JPMorgan Chase (NYSE: JPM)
2. Goldman Sachs (NYSE: GS)
3. Morgan Stanley (NYSE: MS)
4. Barclays (LSE: BARC)
5. UBS (NYSE: UBS)

JPMorgan Chase (NYSE: JPM)

• Full-year 2025 results: Net income of $57bn and return on equity of 17%, both records for the firm. The Corporate and Investment Bank (CIB) saw revenue rise 10%, with Markets revenue up 17%.
• Scale: Total assets of $4.4 trillion at year-end 2025. Assets under management reached $4.8 trillion, up 18% in the year.
• What to watch: JPMorgan is considered the benchmark investment banking franchise globally. Its diversified model, spanning consumer banking, payments, markets and advisory, means it is one of the less volatile pure-play investment banking names. CEO Jamie Dimon's commentary at quarterly earnings is widely followed as a barometer for the US economy.

Goldman Sachs (NYSE: GS)

• Full-year 2025 results: Net revenues of $58.3bn and net earnings of $17.2bn, its second-highest year ever. Equity trading fees reached record levels, rising 23% year-on-year. Investment banking fees rose 24% to $7.7bn for the full year.
• Scale: Total assets of approximately $1.5 trillion. Assets under supervision reached a record $3.17 trillion at year-end 2025.
• What to watch: Goldman has historically been viewed as the most prestigious M&A and capital markets franchise. After a period of strategic repositioning away from consumer banking under CEO David Solomon, the bank has returned to focusing on its core investment banking and markets businesses. Solomon has flagged 2026 as a potentially strong year for M&A activity.

Morgan Stanley (NYSE: MS)

• Full-year 2025 results: Record full-year net revenues of $70.6bn, up from $61.8bn in 2024. Net income of $16.9bn and return on tangible common equity of 21.6%, also records. Equities trading revenues hit an all-time high, up 28% for the full year.
• Scale: Total client assets of $7.7 trillion across Wealth and Investment Management, with $94bn in net new assets in Q1 2025 alone.
• What to watch: Morgan Stanley is increasingly viewed as a wealth management business with a strong investment bank attached, rather than purely an investment bank. This shift towards more recurring, fee-based wealth management revenues has made it a more defensively positioned stock within the sector.

Barclays (LSE: BARC)

• Full-year 2025 results: Total income of £29.1bn, up 9% year-on-year. Profit before tax rose 13% to £9.1bn. The Investment Bank delivered double-digit returns on tangible equity, with IB income rising 16% and FICC up 21%.
• Scale: The largest UK-listed investment bank by revenue, with significant operations in the US following its acquisition of Lehman Brothers' North American operations in 2008.
• What to watch: Barclays is the most accessible investment banking stock for UK investors, listed on the FTSE 100 and ISA-eligible. The bank has been executing a multi-year strategic plan focused on improving returns and increasing capital distributions to shareholders, targeting a return on tangible equity above 14% by 2028.

UBS (NYSE: UBS)

• Full-year 2025 results: Revenue of $49.6bn and net income of $7.8bn for the full year. Assets under management reached $6.99 trillion, making UBS the world's largest private wealth manager.
• Scale: Total assets of $1.6 trillion at year-end 2025, following the completion of the Credit Suisse integration following its acquisition in 2023.
• What to watch: UBS is primarily a wealth management business rather than a pure investment bank but maintains a significant investment banking operation serving institutional clients globally. The ongoing post-integration normalisation and the regulatory environment in Switzerland are the key themes for investors to monitor.

Source: Yahoo Finance

What drives investment bank share prices?

Investment bank stocks tend to be more cyclical than the broader market. Their performance is closely tied to economic conditions and market activity:

Market activity levels

Rising equity markets, high IPO volumes and active M&A pipelines all drive fee income and trading revenues upward. The reverse is also true.

Interest rates

Higher rates generally benefit net interest income for banks with large balance sheets, but can also slow loan growth and weigh on bond valuations.

Trading volatility

Elevated market volatility often boosts trading revenues, as clients seek to hedge positions and manage risk, while excessive volatility can also drive risk-off behaviour.

Regulatory capital requirements

Banks must hold capital against their assets. Changes to capital rules can affect how much business banks can write and how much capital they can return to shareholders.

Macro and geopolitical environment

Economic downturns reduce deal activity, increase credit losses and compress trading volumes, all of which weigh on earnings.

Wealth management AUM

For banks like Morgan Stanley and UBS, total client assets and net new asset flows are important revenue indicators independent of market conditions.

How to get exposure to investment bank stocks with IG

There are several ways to get exposure to investment banking stocks through IG, depending on your risk appetite and investment goals:

For investors who want broad sector exposure rather than individual bank selection, ETFs tracking global financials indices offer diversified access. You can also explore exchange-traded products for other structured approaches to sector exposure.

Risks of investing in investment bank stocks

Alongside the benefits that fluctuations in share prices can bring, there are some key risks to consider too.

• Investment bank revenues are highly cyclical and can fall sharply in a downturn, particularly advisory and trading income. Note the collapse of Credit Suisse, indicating that no bank is too big to fail.
• Leverage: banks operate with significant balance sheet leverage, which amplifies both gains and losses
• Regulatory risk: changes in capital requirements, trading rules or conduct standards can materially affect profitability
• Conduct and legal risk: large banks are exposed to significant fines and penalties for regulatory breaches, as Barclays' motor finance redress provision in 2025 illustrates
• Geopolitical and macro risk: tariffs, trade wars and recessions can rapidly reduce deal volumes and increase credit losses
• Mark-to-market risk: the value of securities held on trading books can fall sharply in volatile markets.                         

For CFDs and spread bets, leverage means losses can exceed your initial deposit (however retail investors are protected against negative balances with us).

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