Investment banks assist corporations in raising funds in the public markets (both equity and debt).
They may sometimes be confused with brokerages, which are firms which assist people in choosing and buying stocks, bonds, and mutual funds. (Of course, it is possible for a brokerage and an investment bank to share common ownership, and most of the largest brokerage companies also do investment banking.)
Investment banks can invest money on stock markets or use advanced products called derivatives. Investment banks can also invest money directly into companies, projects, etc., either as direct investments for which they carry the full risk (known as private equity, venture capital, or merchant banking), or as loans with collaterals to reduce risks. Combinations of derivatives and loans also exist, such as mezzanines.
Investment banks will typically be concerned with several business units, including Corporate Finance (concerned with managing the finances of corporations, including mergers, acquisitions and disposals), often called the Investment Banking Division of the firm; Research (concerned with investigating, valuing, and making recommendations to clients--both individual investors and larger entities such as hedge funds and mutual funds--regarding shares and corporate and government bonds); and Equities or Sales and Trading (concerned with buying and selling shares both on behalf of the bank's clients and sometimes also for the bank itself). Management of the bank's own capital, or Proprietary Trading, is often one of the biggest sources of profit; for example the banks may arbitrage in huge scale if they see a suitable opportunity and/or they may structure their books so that they profit from a fall of bond yields (a rise of bond prices).
Because potential conflicts of interest may arise between different parts of a bank, the authorities that regulate investment banking (the FSA in the United Kingdom and the SEC in the United States) require that banks impose a Chinese wall which prohibits communication between Investment Banking on one side and Research and Equities on the other. The industry in the US has been heavily criticized, and often fined, for failing to actually restrict this communication, and for research divisions pushing stocks which are known to be very poor investments, in exchange for that company doing investment banking business with the bank.
Abuses happen also more frequently in this industry possibly due to the structure of the industry, in which the majority of the money is made by the personal investment banker handling the transaction.
In the United States, the Glass-Steagall Act prohibited banks from offering both commercial and investment services. The Glass-Steagall Act was repealed by the Gramm-Leach-Bliley Act in 1999. In part this was due to the tendency of the U.S. Congress to act itself as an investment bank: Lester Thurow claimed in the 1980s that it served exactly this function, advancing specific industrial policy and agricultural policy by direct grants or subsidies, loan guarantees, and exemption from regulations, taxes or other government-controlled expenses that would otherwise apply. This fusion of the banking and oversight role with fiscal policy was thought to be undesirably political, but inevitable if the US had no large investment banks.
The World Bank and many central banks are considered by most economists to be investment banks, as they can bolster or create currency for specific projects. Banking overlaps with monetary policy at this largest scale.