Banking is comprised of Consumer Banking, Commercial Banking, Global Corporate and Investment Banking and Asset Management. An investment bank offer financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and Equities or advisory services for mergers and acquisitions.
Investment banks are defined as companies that help other companies in increasing financial capital in the capital markets, through things like issuance of stock and bonds. An Investment bank offer financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity and Equities or advisory services for mergers and acquisitions. Investment banks perform, Initial Public offerings (IPO), trades on securities and bonds and they also act as brokers.
Investment Banking Functions
Investment banks have many functions to perform. Some of the most important functions of investment banking are as follows:
IPOs: Investment Banks facilitate public and Private Corporation’s Initial Public Offering known as IPO (issuing securities in the primary market) by providing underwriting services. Other services include acting as intermediaries in trading for clients and foreign exchange management.
Investment management: Investment Bankers also provide advice to investors to purchase, manage and trade various securities (shares, bonds, etc.) and other assets like real estate, hedge fund, mutual funds etc. Investors may be financial institutions or big fund houses or private investors. The investment management division of an investment bank is divided into separate groups, namely, Private Wealth Management and Private Client Services.
Boutiques: Small investment banking firms providing financial services are called boutiques. These mainly specialize in trading bonds, advising for mergers and acquisitions, providing technical analysis etc.
Mergers and Acquisitions: Another major function of the investment banking include mergers and acquisitions (M&A) and corporate finance which involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target.
Structuring of Derivatives: This has been a relatively recent division which involves highly technical and numerate employees working on creating complex structured derivative products which typically offer much greater margins and returns than underlying cash securities.
Merchant banking is nothing but the private equity activity of investment banks. Goldman Sachs Capital Partners and JPMorgan’s One Equity Partners are the current examples. (Note: Originally, “merchant bank” was the British English term for an investment bank.)
Research is another important function of an Investment bank which reviews companies and writes reports about their prospects with “buy” or “sell” ratings. Though this division does not generate direct revenues, the information gathered or produced by them is used to guide investors and in some cases for Mergers and Acquisitions.
Risk management is a continuously ongoing activity which involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent ‘bad’ trades having a detrimental effect to a desk overall.
In general, Investment banks
Acts as intermediary between issuers and investors
Provides Strategic, financial and valuation advisory services.
Raises capital through the issuance of securities, private equity and debt.
Advises companies in merger & acquisition and restructuring transactions
Provides special products and services to the corporate and government clients.