The purpose of an investment bank is to assist firms and individuals with a variety of financial services. An investment bank may offer brokerage services, insurance and wealth protection including underwriting, and consultation in order to suggest a course of action to a person or an institution. Thus, all the other types of financial structures discussed below could be part of or clients of an investment bank, and clientele can exist on several levels (Madura, 2014).
Most investment banks have two parts: consultation or advisory provision and brokerage / sales. There is a potential for unethical behavior due to this structure. For example, the advisory portion could give advice based on what is happening on the brokerage side, and vice versa. Therefore, it is essential that these two parts are kept completely separate (Blundell-Wignall, 2011).
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"Structure and Function of Financial Institutions".
A mutual fund is a portfolio, usually created by an investment bank, that pools money from many investors in order to purchase the kind of high-return securities that can only be purchased in large blocks. An individual investor can buy a relatively small number of shares in a growth fund and anticipate substantial price stability and low risks due to the pooling of assets and diversification of securities (Beck et al., 2010).
Hedge funds are privately held, closed funds that are designed to procure high gains by trading aggressively. An individual should be experienced in investing and trading before participating in a hedge fund because, unlike mutual funds, hedge funds are not regulated by the government, and they are very illiquid (Beck et al., 2010). This is also the reason they are privately held. Still, hedge funds can be very lucrative when they work as expected.
Pension funds are the opposite of hedge funds in many respects. They are designed to conserve and grow capital with as little risk as possible. Since they are long-term investments, immediate liquidity is unnecessary. Their values may be determined with a reasonable amount of certainty since cash flows are not hard to estimate (Madura, 2014).
Insurance companies help consumers and other clients provide for the possibility of loss in life, health, home, auto, and other property. In exchange for premiums, the customer gets risk protection in areas where there is a significant probability of substantial loss — for example, life insurance helps protect families when a “breadwinner” is killed (Madura, 2014).
- Beck, T., Demirgüç-Kunt, A., & Levine, R. (2010). Financial institutions and markets across countries and over time: The updated financial development and structure database. The World Bank Economic Review, 24(1), 77-92.
- Blundell-Wignall, A. (2011). On the necessity of separating investment and commercial banking. Intereconomics, 46(6), 298-299.
- Madura, J. (2014). Financial markets and institutions. Cengage learning.
