Things to Know about Investment Banking

What is Investment Banking?

      Businesses need capital to function, and investors are constantly wandering around for big profits. Investment banks (IB) act as intermediaries working in the capital market, to raise funds for their corporate clients, and/or government agencies, from these investors. In principle, an investment bank can be a sub-division of a much larger bank or it can operate as a stand-alone business altogether.

An investment banking company performs two important basic functions.

1. An investment bank acts as an intermediary between the entities that need capital (companies) and those who offer it (investors). This is generally facilitated through debt and equity options with company assistance.

2. Investment banks advise companies on mergers, restructuring, acquisitions, and other major corporate actions. While some investment banks perform both of these functions. It is important to understand which products and offers each financial institution specializes in.

Investment Banking Definition

According Investopedia.com, investment banking is a specific division of banking associated to the creation of capital for other companies, governments, and other entities.

Investment Banks earn income through charging fees and commissions, for offering these services, and other types of financial and business advice.

Securities are made up of bonds and shares, and a stock offering may also be an initial public offering (IPO). Underwriting is a technique by which the underwriter brings a new security issue to the public investing in an offering. The underwriter guarantees a certain price for a certain number of securities, to the corporation (client) that issues the securities (in return for a fee). Thus, the issuer is confident that they will raise a certain minimum amount, while the underwriter bears the risk of the problem.

What do Investment Banks usually do?

There is sometimes confusion between an investment bank, and a bank's funding banking division (IBD). Investment banking is a full service offering a wide range of services that include underwriting, M and A, income and trading, equity research, asset management, business banking and retail banking. The investment banking division of a financial institution offers only underwriting services and M&A consulting.

Investment banks are regularly divided into 2 camps: buy side and sell side. Many investment banks offer both a buy side and a sell side service. The selling aspect typically refers to selling shares of newly issued IPOs, issuing new bonds, engaging in market-building services, or helping clients facilitate transactions. The buy side, on the other hand, works with mutual funds, pension funds, hedge funds and the investment public to help them maximize their returns when trading or investing in securities such as stocks and bonds.

Let's identify how investment banks make money by providing acquisition advice.

Think company ABC buys some other company XYZ. ABC is in doubt, how much is firm XYZ worth, and what are the long-term benefits in terms of revenues, expenses, etc.

In this scenario, the investment bank would go through a due diligence process, to price the company, finalize the deal by helping ABC prepare important documents, and advise it on the exact timing of the deal.

Here an investment bank, working on the buy side, and some other investment banks may also work on the selling side, to help XYZ. The larger the size of the investment banking transaction, the greater the fees that the bank will accrue.

Investment Bank Structure

Investment Banks considered an all-encompassing financial institution, that provide a range of services, to corporates throughout industries. People might have as many types as they want, however at the end of the day, three most common categories are: Middle Market, Bulge Bracket, and Boutique. Bulge Bracket Banks – the broadest institutions – have the whole organization.

A massive investment bank is divided into the front office – directly producing income for the firm, the middle office – intently supporting the front office, and the back office – responsible for human resources, accounting, and other administrative duties.

Many corporations are adopting new technologies that automates and modernizes banking strategy, to create leaner offices, faster operations and enhance client services. This application allows banks to save manual labor hours, and significantly decrease less palatable fees  to focus on their core business – deliver great services to their clients.

What is the Role of Investment Bankers?

Investment banks employ investment bankers who help governments, companies and other groups to plan, and control large projects, saving their clients time and money by identifying the risks associated with the project, before the client moves forward. In theory, an investment banker should be an expert, who knows the pulse of the modern investment climate.

Institutions and businesses turn to investment banks for advice on how great their development plans are, and investment bankers, using their expertise, adapt their guidelines to current economic conditions.

Conclusion

Investment banks play an important function of facilitating funds and capital allocation for corporations and government entities. They serve as financial advisors to their clients by helping them allocate resources, control instruments and price capital.

Investment banking support is in mergers and acquisitions, raising capital, and providing a number of financial aids. Be it non-public or corporate, investment banking is essentially involved in investment advice and operations are essential in investment activities.