Investment banking is one of the most complex financial mechanisms in the world. It serves many different purposes and business entities. Typically, an investment bank is a private enterprise that provides various financial-related and other services to individuals, corporations, and governments.
Before giving you a vivid description of all the necessary investment banking services, let me first make it clear what actually the investment banking is.
What is Investment Banking?
Investment banking is a special segment of banking operation that is actively related to the creation of capital for companies, governments and other entities. Investment banks underwrite new debt and equity securities for all types of firms and corporations, aid in the sale of securities, and help to facilitate mergers and acquisitions (M&A), reorganizations and broker trades for both institutions and private investors. They also provide guidance to issuers regarding the issue and placement of stock, alongside providing ancillary services such as market making, assistance to FICC services etc.
Understanding the term ‘Investment Banking’
In essence, an investment bank serves as an intermediary between a company and investors when the company wants to issue stock or bonds. It assists large, complicated financial transactions, including advice regarding how much a company is worth and how best to structure a deal if the investment banker’s client is considering an acquisition, merger or sale. This also includes the issuing of securities as a means of raising money for the client groups, and creating the documentation for the Securities and Exchange Commission necessary for a company to go public.
Investment banks employ investment bankers who help corporations, governments and other groups plan and manage large projects, thus saving their client time and money by identifying risks associated with the project before the client moves forward.
Now that you have got the answer to your question “what is investment banking?”, next is to understand, in detail, how investment banking works.
Role of an Investment Bank
One of the primary ways to raise capital by a company is through the sales of stocks and bonds. But the execution of these transactions calls for special expertise, from pricing financial instruments in a way that will maximize revenue to navigating regulatory requirements. This is where the investment banking services appear in the picture.
Role as an Advisor :
Deciding how to raise capital is one of the foremost decisions any company or government needs to take. In most cases, they lean on an investment bank for guidance regarding the same.
Considering the current investing climate, the investment bank will recommend the best way to raise funds. This may entail selling an ownership stake in the company through a stock offer or borrowing from the public through a bond issue. The investment firm can also assist determining how to price these instruments by utilizing sophisticated financial models.
Investment banks also offer advice in a merger or acquisition scenario. For example, if a business is planning to buy a competitor, the bank can advise its management team about the value of the company and how to structure the deal in a way that’s favorable to the buyer.
Underwriting Stocks and Bonds
If a company decides to raise funds through a debt or an equity offering, one or more investment banks will also underwrite the securities. That is, the institution buys a certain number of shares or bonds at a predetermined price and re-sells them through an exchange.
When it comes to stock offerings, investment banks perform a less glamorous role, by creating the documentation that must go to the Securities and Exchange Commission before the company can sell its shares.
- Research – Larger investment banks possess large teams that gather information about companies and offer recommendations on whether to buy or sell their stock.
- Trading and Sales – Almost all major firms have a department that deals only with trading. They execute stock and bond transactions on behalf of their clients.
- Asset Management – This section helps to select the right mix of stocks, debt instruments, real estate trusts and other investment vehicles to achieve their clients’ unique goals.
- Wealth Management – Through a team of financial advisors, investment banking services help individuals and families save for retirement and other long-term needs.
- Securitized Products – An investment bank recommends opportunities to securitize income streams, assemble the assets and market them to institutional investors.
While a good number large investment banks are affiliated with larger banking institutions, many have become familiar household names. Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America Merrill Lynch and Deutsche Bank are some of the largest investment banks as of today.