Meaning of Investment Banking
Investment banking is a special division of banking institutions that primarily deals with raising capital for corporations or entities. It is a financial company or institution which advises large businesses regarding financial services. Investment banking acts as an intermediary between the ones who are willing to invest their funds (investors) and one who require funds for running their business activities (corporations). These institutions assist companies in the creation of capital by underwriting their new equity and debt securities and selling them to the general public. All shares are sold by the investment bank on behalf of the issuer at commission basis which is charged on each share basis. Investment banking also facilitates business in reorganizations, mergers and acquisitions, and trades for both private investors and institutions. Some of the prominent investment banks are Goldman Sachs, Morgan Stanley, JP Morgan, Bank of America, Citigroup, and Deutsche Bank.
Types of Investment Banking
Various types of investment banking services are as discussed in points below: –
This is the primary function of investment banks which facilitate corporations in raising capital. Underwriting services of investment banks are used by corporations whenever they go for the initial public offering process in the primary market. Investment bank work closely with their clients seeking funds and traders who assist in selling securities.
Mergers and Acquisitions (M&A)
Merger and acquisition investment banks provide strategic advice to companies that are either acquiring smaller firms or merging with competitors in the market. There are two parties involved in an M&A transaction that are buy-side and seller-side. Individuals in these banks majorly use financial modeling techniques for forming their suggestions and advice.
Investment bankers offer asset management services to their clients under which they build an efficient portfolio for them. They conduct proper analysis for choosing such securities that yield higher returns at a lower rate of risk. These bankers charge commissions from their clients for providing such services.
These banks have an in-house research department that conducts analysis on equities and other securities for doing safe trading. It enables investors in making strategic investment decisions by coming up with high-profit trading ideas.
Sales and Trading
Investment banks facilitate in buying and selling of securities and other financial instruments for their clients. They work as an agent of their clients by trading the firm’s capital in their own name.
Importance of Investment Banking
The importance of investment banking can be well understood from points below: –
Act as an advisor
Every organization needs to raise funds for carrying out its activities and growing its size of operations. Investment banks assist corporations in creating capital by assisting them in selling their securities at good prices. Various factors such as earning potential and the strength of the management team are taken into consideration while selling the company’s shares in the market by financial analysts. These specific banks also advise companies during their mergers and acquisitions by informing management about a company worth and assisting them in reconstruction tasks.
Underwrites stocks and bonds
Investment bank takes a financial risk by undertaking securities of companies in exchange for a fee. They properly access the degree of risk associated in the business of the insurer. These banks buy shares from clients at pre-discussed prices and then re-sell them to the public via an exchange by keeping some profit margin. All documentation is prepared by the investment bank for submission with SEBI so that a company can sell its shares. Different components included in the process of documentation are financial statements, future plans, management information, and current ownership.
Investment banks also perform several other activities apart from advising and helping companies in raising funds. These activities are asset management, wealth management, research, trading and sales, and securitizing of products.