by An investment bank is a financial services company or corporate division that engages in advisory-based financial transactions on behalf of individuals, corporations, and governments. Traditionally associated with corporate finance, such a bank might assist in raising financial capital by underwriting or acting as the client’s agent in the issuance of securities. An investment bank may also assist companies involved in mergers and acquisitions (M&A) and provide ancillary services such as market making, trading of derivatives and equity securities, and FICC services (fixed income instruments, currencies, and commodities). Most investment banks maintain prime brokerage and asset management departments in conjunction with their investment research businesses. As an industry, it is broken up into the Bulge Bracket (upper tier), Middle Market (mid-level businesses), and boutique market (specialized businesses).
Investment banking is the division of a bank or financial institution that serves governments, corporations, and institutions by providing underwriting (capital raising) and mergers and acquisitions (M&A) advisory services. Investment banks act as intermediaries between investors (who have money to invest) and corporations (who require capital to grow and run their businesses).
All investment banking activity is classed as either “sell side” or “buy side”. The “sell side” involves trading securities for cash or for other securities (e.g. facilitating transactions, market-making), or the promotion of securities (e.g. underwriting, research, etc.). The “buy side” involves the provision of advice to institutions that buy investment services. Private equity funds, mutual funds, life insurance companies, unit trusts, and hedge funds are the most common types of buy-side entities.
Full-service banks offer the following services:
- Underwriting: Capital raising and underwriting groups work between investors and companies that want to raise money or go public via the IPO process. This function serves the primary market or “new capital”.
- Mergers & Acquisitions (M&A): Advisory roles for both buyers and sellers of businesses, managing the M&A process start to finish.
- Sales & Trading: Matching up buyers and sellers of securities in the secondary market. Sales and trading groups in investment banking act as agents for clients and also can trade the firm’s own capital.
- Equity Research: The equity research group research, or “coverage”, of securities helps investors make investment decisions and supports trading of stocks.
- Asset Management: Managing investments for a wide range of investors including institutions and individuals, across a wide range of investment styles.
Underwriting Services in Investment Banking
Underwriting is the process of raising capital through selling stocks or bonds to investors (e.g., an initial public offering IPO) on behalf of corporations or other entities. Businesses need money to operate and grow their businesses, and the bankers help them get that money by marketing the company to investors.
There are generally three types of underwriting:
- Firm Commitment: The underwriter agrees to buy the entire issue and assume full financial responsibility for any unsold shares.
- Best Efforts: Underwriter commits to selling as much of the issue as possible at the agreed-upon offering price but can return any unsold shares to the issuer without financial responsibility.
- All-or-None: If the entire issue cannot be sold at the offering price, the deal is called off and the issuing company receives nothing.
Role
Investment Banks serve as an intermediary between investors and corporations. It helps corporations by pricing securities resulting in maximization of revenue. Investment banks help their clients in meeting regulatory requirements while raising capital as well.
When companies issue IPO, an investment bank may buy all the shares from the company and will sell it in the market as a proxy company. It helps the company in contracting out the IPO to the investment bank itself. It provides advisory services in relation to underwriting services and mergers and acquisitions.
Objectives
In the past, the primary objective of investment banking was to bridge the gap between investors and corporations, individuals, government bodies who needed funds to grow and run their business.
But nowadays, there is no defined limit on the activities that fall in the purview of investment banking. Apart from underwriting and merger & acquisition-related advisory services, investment banks also provide different kinds of ancillary services to their clients like equity trading, market-making, facilitation of transactions, derivative trading, assistance in the analysis of risk associating with managing big projects.
Functions of Investment Banking
- Acts as an intermediary between investors and the company.
- It helps companies in raising capital.
- Provide advisory services for underwriting and merger & acquisition.
- Provide ancillary services like equity, derivative trading, facilitating transactions, market-making, promotion of securities, etc.
Importance of Investment Banking
- In a growing economy where all the companies want to raise capital through stock and shares, Investment Bank with their expertise helps these companies by providing underwriting services, so that businesses can maximize their revenue while staying within the regulatory requirement.
- They provide other ancillary advisory services as well to their clients. Therefore, in a nutshell, these organizations play a pivot role by helping corporate, individuals, and government bodies.
- With their expertise, they help in the growth of the local, national, and the global economy as a whole.
