Services Offered by Securities Firms versus Investment Banks

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Services Offered by Securities Firms versus Investment Banks

  1. 1. Services Offered by Securities Firms versus Investment Banks <ul><li>Investment Banks </li></ul><ul><ul><li>raise the debt and equity securities for corporations or governments including the origination, underwriting, and placement of securities in money and capital markets </li></ul></ul><ul><li>Securities Firms </li></ul><ul><ul><li>services involve assistance in the trading of securities in the secondary markets (brokerage services or market making) </li></ul></ul><ul><li>The largest companies in the industry perform multiple services (e.g., underwriting and brokerage) and are generally called investment banks </li></ul><ul><ul><li>advise corporations on mergers and acquisitions as well as advising on the restructuring of existing corporations </li></ul></ul>
  2. 2. Size, Structure, and Composition of the Industry <ul><li>Three major types of firms </li></ul><ul><ul><li>national full-line investment banks that service retail and corporate customers (e.g., Merrill Lynch) </li></ul></ul><ul><ul><li>national full-line firms that specialize more in corporate finance (e.g., Goldman Sachs) </li></ul></ul><ul><ul><li>the remainder of the industry and includes four classes </li></ul></ul><ul><ul><ul><li>specialized investment bank subsidiaries of commercial banks </li></ul></ul></ul><ul><ul><ul><li>specialized discount brokers </li></ul></ul></ul><ul><ul><ul><li>regional securities firms </li></ul></ul></ul><ul><ul><ul><li>specialized electronic trading securities firms </li></ul></ul></ul>
  3. 3. Securities Firm and Investment Bank Activity Areas <ul><li>Securities firms and investment banks engage in as many as seven key activity areas </li></ul><ul><ul><li>Investing </li></ul></ul><ul><ul><li>Investment Banking </li></ul></ul><ul><ul><li>Market Making </li></ul></ul><ul><ul><li>Trading </li></ul></ul><ul><ul><li>Cash Management </li></ul></ul><ul><ul><li>Mergers and Acquisitions </li></ul></ul><ul><ul><li>Other Service Functions </li></ul></ul>
  4. 4. Investing <ul><li>Involves managing pools of assets such as mutual funds </li></ul><ul><li>Compete with commercial banks, life insurance companies, and pension funds </li></ul><ul><li>Manage funds either as agents for other investors or as principals </li></ul><ul><li>Objective is to select asset portfolios to beat some return-risk performance benchmark such as the S&P 500 </li></ul>
  5. 5. Investment Banking <ul><li>Refers to activities related to underwriting and distributing new issues of debt and equity securities </li></ul><ul><li>Industry is dominated by a small number of underwriting firms </li></ul><ul><li>Securities underwriting can be undertaken through either public or private offerings </li></ul><ul><ul><li>Private placement - securities issue placed with one of a few large institutional investors </li></ul></ul><ul><ul><li>Public placement - may be underwritten on a best efforts or firm commitment basis and offered to the public </li></ul></ul>
  6. 6. Market Making <ul><li>Involves the creation of a secondary market in an asset by a securities firm or investment bank </li></ul><ul><li>Either agency or principal transactions </li></ul><ul><ul><li>Agency transactions - two-way transactions on behalf of customers </li></ul></ul><ul><ul><li>Principal transactions - the market maker seeks to profit on the price movements of securities and takes long or short inventory positions for its own account </li></ul></ul>
  7. 7. Trading <ul><li>Closely related to market-making activities </li></ul><ul><li>Six types of trading </li></ul><ul><ul><li>Position trading - purchases of large blocks on expectation of favorable price move </li></ul></ul><ul><ul><li>Pure Arbitrage - buying an asset in one market and selling it immediately in another market at a higher price </li></ul></ul><ul><ul><li>Risk Arbitrage - buying securities in anticipation of some information release </li></ul></ul><ul><ul><li>Program Trading - simultaneous buying and selling using a computer program to initiate such trades </li></ul></ul><ul><ul><li>Stock Brokerage - trading of securities on behalf of individuals </li></ul></ul><ul><ul><li>Electronic Brokerage - offered by major brokers, direct access via internet to trading floor </li></ul></ul>
  8. 8. Cash Management <ul><li>Securities firms and investment banks offer bank deposit-like cash management accounts (CMAs) to individual investors </li></ul><ul><ul><li>money market mutual fund sold by investment banks that offer check-writing privileges </li></ul></ul>
  9. 9. Mergers and Acquisitions <ul><li>Frequently provide advice on, and assistance in, mergers and acquisitions </li></ul><ul><ul><li>assist in finding merger partners </li></ul></ul><ul><ul><li>underwrite any new securities </li></ul></ul><ul><ul><li>asses the value of target firms </li></ul></ul><ul><ul><li>recommend terms of the merger agreement </li></ul></ul><ul><ul><li>assist target firms in preventing a merger </li></ul></ul>
  10. 10. Other Service Functions <ul><li>Custody and escrow services </li></ul><ul><li>Clearance and settlement services </li></ul><ul><li>Research and advisory services </li></ul>
  11. 11. Balance Sheet Assets Assets Cash $ 27,780.4 1.26% Receivable from other broker-dealers 766,399.7 34.72 Receivable from customers 135,723.3 6.15 Receivables from noncustomers 19,296.1 0.87 Long positions in securities/commodities 514,949.9 23.33 Securities and investments not marketed 8,833.8 0.40 Securities purchased w/resell agreement 647,360.8 29.33 Exchange membership 933.0 0.04 Other assets 85,964.0 3.90 Total assets $2,111,191.2 100.00
  12. 12. Balance Sheet Liabilities Liabilities Bank loans payable $ 47,363.2 2.15% Payables to other broker-dealers 361,774.7 16.39 Payables to noncustomers 39,604.9 1.79 Payables to customers 239,797.3 10.86 Short positions in securities/commodities 263,219.8 11.93 Securities sold w/repurchase agreements 933,214.3 42.28 Other nonsubordinated liabilities 170,715.5 7.73 Subordinated liabilities 55,501.5 2.52 Total liabilities $2,111,191.2 95.65 Capital Equity capital 96,049.8 4.35 Number of firms 7,785
  13. 13. Regulation <ul><li>The primary regulator of the securities industry is the Securities and Exchange Commission (SEC) established in 1934 </li></ul><ul><li>SEC sets rules governing securities firms’ underwriting and trading activities </li></ul><ul><li>The Securities Investor Protection Corporation (SIPC) protects investors against losses of up to $500,000 on securities firm failures </li></ul>

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