Investment BankingAn investment bank is a financial institution which raises capital, trades securities, and managescorporate mergers and acquisitions. Another term used for investment banking is corporate finance.Investment banks work for companies and governments, and profit from them by raising moneythrough the issuance and selling of securities in capital markets (both equity and debt) and insuringbonds (for example selling credit default swaps), and providing the necessary advice on transactionssuch asmergers and acquisitions. Most of investment banks provide strategic advisory services formergers, acquisitions, divestiture or other financial services for clients, like the trading of derivatives,commodity, fixed income, foreign exchange, and equity securities.Investment banking is a form of banking which finances the capital requirements of enterprises.Investment banking assists as it performs IPOs, private placement and bond offerings, acts as broker andhelps in carrying out mergers and acquisitions.An Investment Banker can be considered as a total solutions provider for any corporate, desirous ofmobilizing its capital. The services provided range from investment research to investor service on theone hand and from preparation of the offer documents to legal compliances & post issue monitoring onthe other. A long lasting relationship exists between the Issuer Company and the Investment Banker.Functions of Investment Banking:Investment banks carry out multilateral functions. Some of the most important functions of investmentbanking are as follows: Investment banking helps public and private corporations in issuance of securities in the primary market. They also act as intermediaries in trading for clients. Investment banking provides financial advice to investors and helps them by assisting in purchasing and trading securities as well as managing financial assets Investment banking differs from commercial banking as investment banks dont accept deposits neither do they grant retail loans. Small firms which provide services of investment banking are called boutiques. They mainly specialize in bond trading, providing technical analysis or program trading as well as advising for mergers and acquisitionsCore activities of Investment Banking Investment banking: is the traditional aspect of investment banks that involves helping customers raise funds in the capital markets and advise them on mergers and acquisitions. Investment banking can also involve subscribing investors to a security issuance, negotiating with a merger target and coordinating with bidders.
Sales and trading: Depending on the needs of the bank and its clients, the main function of a large investment bank is buying and selling products. In market making, the traders will buy and sell securities or financial products with the goal of earning an incremental amount of money on every trade. Sales is the term that is used for the sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas and take orders Research: is the division of investment banks which reviews companies and makes reports about their prospects, often with "buy" or "sell" ratings. Although the research division generates no revenue, its resources can be used to assist traders in trading, can be used by the sales force in suggesting ideas to the customers, and by the investment bankers for covering their clients.As the credit crisis unfolded, Ive heard a lot of investors asking the question "What is an investmentbank and how does it differ from a regular, commercial bank?" Unless you work in finance, you may nothave come across the term investment bank before the global meltdown began.To put it simply, an investment bank is nothing like the corner institution youre used to dealing with toget a business loan or deposit your paycheck. Instead, an investment bank is a special type of financialinstitution that works primarily in higher finance by helping company access the capital markets(stock market and bond market, for instance) to raise money for expansion or other needs. If Coca-ColaEnterprises wanted to sell $10 billion worth of bonds to build new bottling plants in Asia, an investmentbank would help them find buyers for the bonds and handle the paperwork, along with a team oflawyers and accountants.In the next few minutes, youre learn how investment banks make their money and why they helpedcause one of the greatest financial meltdowns in history.Activities of a Typical Investment BankA typical investment bank will engage in some or all of the following activities: Raise equity capital (e.g., helping launch an IPO or creating a special class of preferred stock that can be placed with sophisticated investors such as insurance companies or banks) Raise debt capital (e.g., issuing bonds to help raise money for a factory expansion) Insure bonds or launching new products (e.g., such as credit default swaps) Engage in proprietary trading where teams of in-house money managers invests or trades the companys own money for its private account (e.g., the investment bank believes goldwill rise so they speculate in gold futures, acquire call options on gold mining firms, or purchase gold bullion outright for storage in secure vaults).
Up until ten years ago, investment banks in the United States were not allowed to be part of a largercommercial bank because the activities, although extremely profitable if managed well, posed far morerisk than the traditional lending of money done by commercial banks. This was not the case in the rest ofthe world. Countries such as Switzerland, in fact, often boasted asset management accounts thatallowed investors to manage their entire financial life from a single account that combinedbanking, brokerage, cash management, and credit needs.Most of the problems youve read about as part of the credit crisis and massive bank failures werecaused by the internal investment banks speculating heavily with leverage oncollateralized debtobligations (CDOs). These losses had to be covered by the parent bank holding companies, causing hugewrite-downs and the need for dilutive equity issuances, in some cases nearly wiping out regularstockholders. A perfect example is the venerable Union Bank of Switzerland, or UBS, which reportedlosses in excess of 21 billion CHF (Swiss Francs), most of which originated in the investment bank. Thelegendary institution was forced to issue shares as well as mandatory convertible securities, diluting theexisting stockholders, to replace the more than 60% of shareholder equity that was obliterated duringthe meltdown.The Buy Side vs. Sell Side of an Investment BankInvestment banks are often divided into two camps: the buy side and the sell side. Many investmentbanks offer both buy side and sell side services. The sell side typically refers to selling shares of newlyissued IPOs, placing new bond issues, engaging in market makingservices, or helping clients facilitatetransactions. The buy side, in contrast, worked with pension funds, mutual funds, hedge funds, and theinvesting public to help them maximize their returns when trading or investing in securities such asstocks and bonds.Front Office, Middle Office, and Bank OfficeMany investment banks are divided into three categories that deal with front office, back office, ormiddle office services. Front Office Investment Bank Services: Front office services typically consist of investment banking such as helping companies in mergers and acquisitions, corporate finance (such as issuing billions of dollars in commercial paper to help fund day-to-day operations, professional investment management for institutions or high net worth individuals, merchant banking (which is just a fancy word for private equity where the bank puts money into companies that are not publicly traded in exchange for ownership), investment and capital market research reports prepared by professional analysts either for in-house use or for use for a group of highly selective clients, and strategy formulation including parameters such as asset allocation and risk limits. Middle Office Investment Bank Services: Middle office investment banking services include compliance with government regulations and restrictions for professional clients such as banks, insurance companies, finance divisions, etc. This is sometimes considered a back office function.
It also includes capital flows. These are the people that watch money coming into and out of thefirm to determine the amount of liquidity the company needs to keep on hand so that it doesntget into financial trouble. The team in charge of capital flows can use that information to restricttrades by reducing the buying / trading power available for other divisions.Back Office Investment Bank Services: The back office services include the nuts and bolts of theinvestment bank. It handles things such as trade confirmations, ensuring that the correctsecurities are bought, sold, and settled for the correct amounts, the software and technologyplatforms that allow traders to do their job are state-of-the-art and functional, the creation ofnew trading algorithms, and more. The back office jobs are often considered unglamorous andsome investment banks outsource to specialty shops such as custodial companies. Nevertheless,they allow the whole thing to run. Without them, nothing else would be possible.