What Wall Street firms actually do

Transcript

We hear about Wall Street all the time, but what do they actually do? Welcome back to Money Machines, where today we have a bonus episode. Do you miss to find these big Wall Street financial firms? So let's dive in. Okay, first up, obviously we have investment banking. This is classic Wall Street deal-making, underwriting IPOs, helping companies issue stock or bonds to raise capital, advising on M&A, which just means buying and selling companies and collecting a fee for all these services. Now, this is the stuff that especially Goldman Sachs and Morgan Stanley are known for, although they do a bunch of other stuff and we'll get to that. And along with JP Morgan, Bank of America and City, they make up the US side of what are called the Bolt-Bracquet firms, huge full-service investment banks. Contrast that with retail banking, which is the stuff that you and I are familiar with. Checking accounts, savings accounts, auto, loans, mortgages, credit cards. Whenever you use an ATM or a go-to-your-local chase branch, you're getting retail banking services. And the revenue engine here is predominantly net interest income. It's one of bank borrowers money at a low rate, which is basically our deposits, and then loans that money out at a higher rate, collecting the spread. So JP Morgan Chase has over 2 trillion in cheap customer deposits, kind of an unfair advantage when it comes to lending. The other big players here are Bank of America while Svargo, also sometimes called Universal Banks, which means they do everything under one roof. Let's move on to commercial banking. This phrase tends to refer to the division that offers banking services to businesses, especially mid-sized companies. Think business loans, credit lines, equipment financing, cash management, a regional manufacturer that needs to borrow 5 million for a new warehouse would tap a commercial banker. Corporate banking tends to be more for larger corporations. Think Apple or Boeing, a multinational that wants to pay suppliers across 40 different countries, a firm that wants to convert millions in US dollars into euros. This is where city JP Morgan and HSBC are especially strong. Sometimes you'll hear the term wholesale banking as an umbrella term to encompass all these different kinds of services for institutional clients. That means hedge funds, pension funds, insurance companies, sovereign wealth funds, corporations, everything we discussed so far except for retail banking. And next we have wealth management. Basically helping people manage their money through financial planning, investment advice, and planning around things like retirement in taxes. This generates fees often based on the amount of client money being managed. If wealth management is kind of like taking business class, private banking is flying a private jet. It's more specialized for the needs of the wealthy. So if you need help with custom loans, trust is state planning, borrowing against your warhol, then you would go to Morgan Stanley, JP Morgan, Goldman Sachs, UBS is a big player here. And then we have asset management. So this is investing client capital in stocks and bonds and other assets. Clients can be institutions or regular people investing through ETFs and mutual funds. Asset management typically generates revenue as a percentage of the assets. This is a big business at JP Morgan, Goldman Morgan Stanley. And it's basically the entirety of the business at BlackRock or Vanguard, which are non-bank asset managers. Finally, there's sales and trading where banks help big investors buy and sell things like stocks, bonds, and currencies. Huge money makers and sometimes even bigger than the investment banking divisions. And these trading desks make money from spreads and commissions. A spread is basically the difference between what these firms will buy those assets for and what they sell them for. So now you know better what the money machines of Wall Street actually do. Follow me for more breakdowns of business tech and money.

Transcribed automatically from the video, so small errors are possible.