How GOLDMAN SACHS makes money?


Today, the $SPX500 is back at all time high. Does this means that stocks are expensive? Not at all since interest rates are still very low and the yield on the 10-year Treasury bonds is 2.32%, so it is still a good time to invest in stocks.

Let's now talk about $GS , the second largest investment bank in the world after $JPM . When we are talking about investment banking, there are three main players: JPMorgan, Goldman Sachs and Morgan Stanley. Each one of these have different types of operations. The prime purpose of an investment bank is to connect the sellers to the buyers. So let's say, for example you have a company and you're issuing bonds. You'll need an investment bank which will sell these bonds for you. The bank typically makes money by taking a fee from you or buying some of the bonds themselves and sell it at a better price later. Goldman Sachs has always been focused on IPOs. This year, they were the underwriter for $UBER , for example. On the other hand, $JPM rarely makes IPOs and are more concerned with mergers, they did the $BAYN.DE - Monsanto deal last year. Goldman Sachs is also a trading bank. In the past, banks used to be composed of a group of partners who would trade the assets of the banks and these partners were the owners of the bank. Eventually, the investment banks became public to raise capital. Goldman Sachs only had its IPO in 1999 and was, therefore, the last of the big banks to maintain the tradition of partnerships. Nevertheless, Goldman Sachs still has partners today among their employees. Goldman Sachs is also one of the hardest place to get a job. They have an acceptance rate of only 4% out of the 250 000 applications they receive each year. They also spend half of all their expenses on salaries. So why they are so focused on having the best employees? Because they make a lot of money from trading and they want the best traders. It is not the typical type of trades that retail investors, like us, do. The bank is one of the largest market makers in the world, it means they bring liquidity to the market by buying stocks from the exchange and then selling them to brokers. They bid on treasury bonds to determine the price. They bid on $oil futures to determine the price. That's why you always see spreads when buying a security, an investment bank is making money. Goldman Sachs also has investments of their own and they offer analysis services. To conclude, Goldman Sachs is a bank thriving on a volatile market. Their record year in terms of revenue and net income was 2009 because the market was very volatile then. The traders there were smart enough to short the housing market. But they also had to pay a huge fine later because they were suggesting their customers to buy these mortgage-backed securities. Goldman Sachs has been involved in many scandals and that's because it gives freedom to its employees to operate and some of them are just crooks who happen to be smart. But the bank itself, is one of the most important and powerful companies in the world. Since it thrives in volatility, I consider $GS as a sort of hedge, like $GOLD or the $VXXB but with less volatility in turbulent times.

In recent years, $GS has also tried some retail banking though Marcus. For example, they partnered with $AAPL and $MA to create the Apple Card but this is very small part of their business.

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