Investment Banking: Meaning, Types and Importance

Meaning of Investment Banking

Investment banking is a special division of banking institution which primarily deals with raising capital for corporations or entities. It is a financial company or institution which advises large business regarding financial services. Investment banking acts an intermediary in between the one who are willing to invest their funds (investors) and one who require funds for running their business activities (corporations). These institutions assist companies in creation of capital by underwriting their new equity and debt securities and selling them to general public. All shares are sold by investment bank on behalf of 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 Deutshe bank.

Types of Investment Banking

Various types of investment banking services are as discussed in points below: –

  • Underwriting: This is the primary function of investment banks in which they facilitate corporations in raising capital. Underwriting services of investment bank are used by corporations whenever they go for initial public offering process in 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 bank provide strategic advice to companies who are either acquiring smaller firms or merging with competitors in market. There are two parties involved in M&A transaction that are buy side and seller side. Individuals in these banks majorly uses financial modelling technique for forming their suggestions and advices. 
  • Asset Management: Investment bankers offers 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 lower rate of risk. These bankers charge commission from their clients for providing such services. 
  • Equity Research: 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 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 need to raise funds for carrying out its activities and growing their size of operations. Investment bank assist corporations in creating capital by assisting them in selling their securities at good prices. Various factors such as earning potential and strength of management team are taken into consideration while selling company’s shares in market by financial analyst. These specific banks also advices companies during their mergers and acquisitions by informing management about company worth and assisting them in reconstruction task.  
  • Underwrites stocks and bonds: Investment bank takes financial risk by undertaking securities of companies in exchange for a fee. They properly access the degree of risk associated in business of insurer. These banks buy shares from clients at pre discussed price and then re-sell them to public via an exchange by keeping some profit margin. All documentation is prepared by investment bank for submission with SEBI so that a company can sell its shares. Different components included in process of documentation are financial statements, future plans, management information, and current ownership. 
  • Other activities: Investment bank 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, securitizing of products.