Goldman Sachs is an investment bank that makes money by helping companies raise capital, advising on mergers and acquisitions, trading securities and derivatives for clients and its own account, and managing assets for institutional and wealthy individual investors. Unlike commercial banks that focus on deposits and loans, Goldman Sachs operates primarily in capital markets, serving corporations, governments, and institutional investors rather than everyday consumers.
Key takeaways
- Goldman Sachs generates revenue through three main divisions: investment banking (advisory and underwriting fees), global markets (trading commissions and market-making spreads), and asset management (fees based on assets under management)
- The firm differs from commercial banks by focusing on institutional clients and capital markets services rather than consumer deposits and retail lending
- Investment banking fees come from advising companies on M&A transactions and helping them issue stocks and bonds
- Trading operations generate income through market-making, executing client trades, and proprietary positions in equities, fixed income, currencies, and commodities
- Asset management revenue grows as the firm manages more money for pension funds, endowments, sovereign wealth funds, and high-net-worth individuals
What does Goldman Sachs do?
Goldman Sachs operates as a financial intermediary in capital markets. The firm connects companies that need capital with investors who have capital, facilitating the flow of money through the global financial system. This role manifests across three core business lines that each serve different client needs and generate distinct revenue streams.
The investment banking division advises corporate clients on strategic transactions and helps them access capital markets. When a company wants to acquire a competitor, go public, or issue bonds, Goldman Sachs provides expertise on structuring the deal, valuing assets, and navigating regulatory requirements. The firm earns fees calculated as a percentage of transaction value—typically 1-7% for M&A advisory work and 2-5% for underwriting securities offerings.
Global markets operations involve buying and selling securities on behalf of clients and maintaining trading positions to provide liquidity. If a pension fund wants to buy 100,000 shares of a stock, Goldman Sachs can execute that order and often holds inventory to facilitate immediate transactions. The firm profits from bid-ask spreads (the difference between buying and selling prices) and commissions on executed trades.
Asset management serves institutional investors and wealthy individuals who want professional investment management. The division oversees portfolios across equities, fixed income, real estate, and alternative investments. Revenue comes from management fees (typically 0.5-2% of assets annually) and sometimes performance fees when returns exceed agreed benchmarks.
How investment banking generates revenue
Investment banking revenue depends on transaction volume and deal size. Advisory fees for mergers and acquisitions represent a significant portion of this income. When Company A wants to buy Company B for $5 billion, Goldman Sachs might earn $50-100 million for providing valuation analysis, negotiation support, and transaction execution.
Underwriting: The process where investment banks purchase securities from an issuer and resell them to investors, assuming the risk that they might not sell all shares or bonds at the expected price. Banks earn the spread between what they pay the issuer and what they receive from investors.
Equity and debt underwriting creates another revenue stream. When a company conducts an initial public offering, Goldman Sachs might underwrite the deal by agreeing to purchase shares at a set price and then selling them to institutional investors. If the company issues $1 billion in stock, the underwriting fee might reach $30-70 million depending on deal complexity and market conditions.
This business model ties revenue directly to market activity. During periods of high M&A volume or strong IPO markets, investment banking fees surge. When markets freeze or corporate executives become cautious about deals, revenue declines sharply. The division operates with relatively low capital requirements but depends heavily on relationship networks and reputation.
Understanding the trading business
Trading operations work differently than investment banking because they require significant capital to hold inventory and manage risk. Goldman Sachs maintains positions in thousands of securities across asset classes, ready to buy from or sell to clients immediately.
Market-making involves quoting both bid and ask prices for securities. If a client wants to sell bonds immediately, Goldman Sachs might buy them at $99 and then find another buyer at $99.50, capturing the $0.50 spread. Multiply this across millions of transactions daily, and the spreads accumulate into substantial revenue.
The fixed income, currencies, and commodities trading (FICC) business typically generates larger revenue than equities trading. Corporate bonds, government securities, currency pairs, and commodity derivatives all trade through Goldman Sachs's platforms. Clients include hedge funds executing complex strategies, corporations hedging currency exposure, and asset managers rebalancing portfolios.
Equities trading involves similar dynamics but focuses on stocks and equity derivatives. Goldman Sachs facilitates block trades (large stock purchases or sales), provides algorithmic execution services, and trades derivatives like options and swaps. The firm also takes proprietary positions—meaning it risks its own capital betting on market movements—though regulations since 2008 have limited this activity.
Market-making: The practice of simultaneously offering to buy and sell a security to provide liquidity to markets. Market makers profit from the bid-ask spread while accepting the risk that prices might move against their inventory positions.
Trading revenue fluctuates based on market volatility, client activity levels, and the firm's ability to manage risk. High volatility often increases trading volumes and widens spreads, boosting profitability. Calm markets with narrow spreads compress margins even as transaction costs remain constant.
How does Goldman Sachs differ from commercial banks?
The distinction between Goldman Sachs and commercial banks like JPMorgan Chase centers on funding sources, regulatory frameworks, and client bases. Commercial banks collect deposits from consumers and businesses, then lend that money out as mortgages, auto loans, and business credit. Their profit comes primarily from net interest margin—the difference between interest earned on loans and interest paid on deposits.
Goldman Sachs historically avoided the deposit-gathering business, instead funding operations through wholesale borrowing in capital markets and using shareholder equity. The firm became a bank holding company during the 2008 financial crisis to access Federal Reserve emergency lending, and has since added some deposit-taking through its Marcus consumer banking platform. But deposits remain a smaller part of the funding mix compared to traditional commercial banks.
Client composition differs dramatically. Commercial banks serve millions of retail customers who need checking accounts, credit cards, and home loans. Goldman Sachs focuses on institutional clients—corporations, governments, pension funds, endowments, and high-net-worth individuals with investable assets exceeding $10 million. This creates a business model built on large, sophisticated transactions rather than high-volume consumer services.
Regulatory requirements reflect these differences. Commercial banks face strict capital requirements tied to their loan portfolios and must maintain liquidity to honor deposit withdrawals. Investment banks face different capital rules focused on trading book risks and counterparty exposures. Both operate under Federal Reserve supervision since 2008, but the specific constraints and risk models differ significantly.
What is the asset management business model?
Asset management generates predictable recurring revenue compared to the transaction-dependent investment banking and trading divisions. Goldman Sachs manages money for institutional investors who lack internal expertise or prefer to outsource investment decisions.
The revenue model involves charging fees based on assets under management (AUM). If Goldman Sachs manages $100 billion in client assets and charges a 1% annual fee, that produces $1 billion in revenue regardless of market performance. Some strategies also include performance fees—typically 20% of returns above a benchmark—which create upside when investments perform well.
Investment strategies span multiple asset classes. Traditional long-only equity and fixed income portfolios form the foundation, often tracking or attempting to outperform market indexes. Alternative investments include private equity funds, hedge funds, real estate partnerships, and infrastructure investments. These alternatives typically command higher fees due to complexity and longer lockup periods.
Growth in this division depends on winning new mandates, retaining existing clients, and achieving strong investment returns that attract additional assets. A pension fund satisfied with Goldman Sachs's performance might allocate more money to the firm or recommend it to peer institutions. Poor performance leads to client departures and difficulty attracting new business.
Who are Goldman Sachs's customers?
Corporate clients represent a core customer segment for investment banking services. Public companies use Goldman Sachs for M&A advisory, equity and debt issuance, and strategic financial guidance. Private companies engage the firm when considering sales, seeking growth capital, or preparing for public offerings.
Institutional investors—pension funds, insurance companies, sovereign wealth funds, endowments, and mutual funds—utilize trading and asset management services. These clients manage billions in assets and require sophisticated execution capabilities, research insights, and customized investment solutions.
Hedge funds and private equity firms depend on Goldman Sachs for prime brokerage services, which provide leverage, securities lending, trade execution, and risk analytics. These relationships generate revenue through financing spreads, lending fees, and trading commissions.
Governments and government agencies use Goldman Sachs when issuing bonds, managing debt portfolios, or seeking advice on privatizations and infrastructure financing. Sovereign wealth funds managing national reserves often allocate portions to Goldman Sachs's asset management division.
High-net-worth individuals access the firm through private wealth management, which requires minimum account sizes typically starting at $10 million. Services include portfolio management, estate planning, tax optimization, and access to alternative investments unavailable to retail investors.
Revenue drivers and business economics
Market conditions influence revenue more than most industries. Bull markets drive investment banking activity as companies feel confident pursuing acquisitions and capital raises. Trading volumes increase when investors actively reposition portfolios. Asset management assets grow as market appreciation increases the value of existing holdings.
Bear markets or recessions create headwinds. Companies postpone M&A deals and equity issuances when stock prices decline. Trading revenue can remain strong due to volatility, but client risk aversion sometimes reduces activity. Asset management revenue falls as market declines reduce AUM, though flows from worried clients seeking safety can partially offset this.
Interest rates affect multiple business lines. Rising rates increase the cost of funding trading inventory and can slow M&A activity as acquisition financing becomes more expensive. Falling rates often stimulate corporate activity and support asset prices, benefiting most divisions.
Compensation represents the largest expense category, typically consuming 35-45% of revenue. Investment banking and trading depend on highly skilled professionals who command significant salaries and bonuses. The firm must balance paying enough to retain top talent against maintaining profitability for shareholders.
Technology spending has grown as electronic trading, algorithmic execution, and data analytics become central to competitiveness. Goldman Sachs invests billions annually in systems that process transactions, manage risk, and analyze markets faster than human traders can react.
Try it yourself
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- Compare Goldman Sachs's revenue mix to Morgan Stanley's — which divisions contribute most to each firm's earnings and how does that affect their risk profiles?
Frequently asked questions
What does Goldman Sachs do in simple terms?
Goldman Sachs helps companies raise money and complete mergers, trades securities for institutional clients while making markets, and manages investment portfolios for pension funds and wealthy individuals. The firm acts as a financial intermediary, connecting entities that need capital with those that have capital to invest. Unlike retail banks, Goldman Sachs focuses on serving corporations, governments, and institutional investors rather than everyday consumers.
How is Goldman Sachs explained to beginners?
Think of Goldman Sachs as a financial services firm for large organizations rather than individuals. When a company wants to sell part of itself through an IPO, Goldman Sachs helps execute that process. When a pension fund needs to buy or sell millions in securities, Goldman Sachs facilitates those trades. The firm makes money through fees, commissions, and spreads across these activities rather than through consumer deposits and loans.
Is Goldman Sachs a bank or investment firm?
Goldman Sachs operates as both—it's technically a bank holding company regulated by the Federal Reserve, but functions primarily as an investment bank. The firm gained this dual status during the 2008 financial crisis. While it now takes some deposits through its consumer banking platform, the core business remains investment banking, trading, and asset management rather than traditional commercial banking activities like consumer loans and branch networks.
What is GS known for in the financial industry?
Goldman Sachs built its reputation on M&A advisory work and equity underwriting, often representing high-profile clients in complex transactions. The firm gained prominence by taking technology companies public during the 1990s and advising on blockbuster mergers. Its trading desks are known for sophisticated risk management and market-making across asset classes. The firm has also cultivated a reputation for recruiting and developing talented bankers and traders who often move into senior roles at other financial institutions or corporations.
How does Goldman Sachs make money from trading?
Trading revenue comes from bid-ask spreads, commissions, and gains on positions held in inventory. When Goldman Sachs quotes a price to buy a bond at $100 and sell it at $100.25, that $0.25 spread represents potential profit. The firm also earns commissions when executing trades for hedge funds and asset managers. Market-making requires holding securities inventory, and Goldman Sachs can profit when the value of that inventory appreciates, though it also bears the risk of losses when prices decline.
Why do companies use Goldman Sachs for investment banking?
Companies choose Goldman Sachs for its relationships with institutional investors, experience executing complex transactions, and reputation that can add credibility to deals. When a company goes public, Goldman Sachs can connect it with pension funds, mutual funds, and hedge funds that become shareholders. For M&A transactions, the firm brings valuation expertise, negotiation experience, and knowledge of potential buyers or targets. The Goldman Sachs name on a deal can signal quality to markets, potentially improving pricing and reception.
What types of assets does Goldman Sachs manage?
The asset management division oversees traditional stocks and bonds, private equity funds, real estate investments, infrastructure projects, hedge fund strategies, and credit portfolios. Clients can access separately managed accounts tailored to specific needs, commingled funds that pool multiple investors, and alternative investment vehicles with longer lockup periods. Strategies range from passive index tracking to active management attempting to beat benchmarks through security selection and market timing.
How does Goldman Sachs differ from retail brokers?
Retail brokers serve individual investors with relatively small accounts, offering stock trading apps, retirement accounts, and financial planning services. Goldman Sachs serves institutional clients and wealthy individuals, providing sophisticated execution for large trades, custom portfolio solutions, and access to alternative investments. Retail brokers make money primarily from payment for order flow, account fees, and margin interest. Goldman Sachs generates revenue through institutional commissions, underwriting fees, and asset management charges that reflect the complexity of services provided.
Bottom line
Goldman Sachs operates at the center of global capital markets, generating revenue by facilitating corporate transactions, trading securities for institutional clients, and managing investment portfolios. The business model differs from commercial banking by focusing on capital markets services rather than consumer deposits and loans, serving corporations and institutional investors who need sophisticated financial expertise. Understanding what Goldman Sachs does requires recognizing how investment banking advisory fees, trading spreads and commissions, and asset management charges combine to create a diversified revenue stream tied to market activity levels.
Evaluating financial services companies requires understanding their business models, revenue sources, and risk exposures. You can explore analysis frameworks for banks and financial firms through Rallies.ai's stock analysis resources, or research Goldman Sachs specifically using AI-powered tools designed for investors.
Disclaimer: This article is for educational and informational purposes only. It does not constitute investment advice, financial advice, trading advice, or any other type of advice. Rallies.ai does not recommend that any security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. All investments involve risk, including the possible loss of principal. Past performance does not guarantee future results. Before making any investment decision, consult with a qualified financial advisor and conduct your own research.
Written by Gav Blaxberg, CEO of WOLF Financial and Co-Founder of Rallies.ai.
