How Do Securities Firms Differ From Investment Banks

by John Csiszar ; Updated September 26, 2017
Businessman analyzing investment charts with laptop

Securities firms and investment banks often operate in close proximity, but each has a distinct role in the financial services world. An investment bank can be thought of as the very top of the pyramid in the world of securities, as they bring new securities to the marketplace. Beneath the investment bank, a securities firm works to facilitate purchases of the new product and of all existing products in the marketplace. Thus, the two have a symbiotic relationship but with very different individual functions.

Investment Banking

An investment bank is different from a securities firm, but it is also different from a commercial bank. The main purpose of an investment bank is to help a client issue securities, such as stocks and bonds, to the marketplace. Whereas a commercial bank may lend a client money from its own capital, an investment bank seeks out new investors to purchase the securities for its client, thereby raising money for the company. In order to successfully sell new securities to the marketplace, investment bankers must make accurate judgments of the value of the company, and price the securities accordingly, in order to generate investor demand. The success of an investment bank lies in its ability to raise the most money possible for its clients.

Securities Firms

Securities firms do not issue securities, but rather trade them in the open market. The securities side of the business can only pair buyers with the new stock being brought to market, while the investment banking division actually issues the new stock. Securities firms primarily exist to facilitate buy and sell transactions between individual investors.

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Glass-Steagall Act

The Glass-Steagall Act of 1934 erected barriers between the banking and securities sides of financial services firms. In the aftermath of the stock market crash of 1929 and the subsequent Great Depression, politicians and investors alike were concerned that securities trading had contributed to the collapse of many banks. Thus, the two entities were separated by a so-called "Chinese Wall" through which no information was supposed to pass.

Gramm-Leach Bliley Act

In November 1999, the Glass-Steagall Act was effectively repealed by the Gramm-Leach Bliley Act, allowing banks to to affiliate themselves once again with securities firms. As a result, many investment banks and securities firms generated new relationships, and ultimately most major securities firms had their own investment banking division. When an investment bank brings new securities to the market, they are distributed by the securities division of the firm. This helps the securities division attract and retain clients, as they have access to new issues before other investors.

Institutional Versus Retail Services

The functions an investment bank performs are institutional in nature, as they work almost exclusively with companies trying to issue new securities. After initial issuance, investment banks maintain relationships with companies and often advise on future mergers and acquisitions or additional security sales. Securities firms, on the other hand, are primarily retail-oriented, serving the needs of individual investors. Rather than creating new product and advising corporations, securities firms focus more on the investment planning needs of individuals.

About the Author

After receiving a Bachelor of Arts in English from UCLA, John Csiszar earned a Certified Financial Planner designation and served 18 years as an investment adviser. Csiszar has served as a technical writer for various financial firms and has extensive experience writing for online publications.

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