Investment Banking In A Nutshell

Investment Banking In A Nutshell
August 01 10:25 2019 Print This Article

Investment banking or I-Banking is a particular division of banking that deals with the creation of capital for governments, companies, and other entities. Investment banks aid in the sale of securities, underwrite equity securities and new debt for all kinds of corporations, help to facilitate acquisitions and mergers, reorganizations and broker trades for both private investors and institutions. These banks also offer guidance to issuers about the issue as well as placement of stocks.

Understanding I-Banking

Most of the large I-banking systems are subsidiaries of or affiliated with larger banking institutions. A majority of them have become household names such as Chardan.com. In a broader sense, investment banks offer assistance in large, complex financial transactions.

They could provide advice on how to structure a deal and how much an entity is worth in case the client company is considering a merger, acquisition, or sale. They may also help with creating the documentation for the Securities and Exchange Commission needed for a company to go public. Additionally, they offer assistance on issuing of securities as a means to raise money for the client groups.

The role of investment bankers

Investment banks usually employ investment bankers who help governments, companies, and other groups plan and manage big projects, saving their client’s time and money by figuring out the risks associated with the project before the client moves forward. Theoretically, investment bankers are professionals in their area of expertise. They’ve updated information on the current investing climate. So institutions and businesses turn to these banks for advice on how to plan their development perfectly because investment bankers could customize their suggestions to the present state of economic affairs.

Essentially, investment banks act as middlemen between investors and a company when the company intends to issue bonds or stocks. The bank offers help on pricing financial instruments to maximize revenue and ensure seamless regulatory requirements. In many cases, when a company holds its IPO, an investment bank will buy all or a major portion of the shares directly from the company.

Eventually, the bank will sell all the shares it has on the market. Here the bank acts as a proxy for the company holding the initial public offering (IPO). That makes things a lot easier for the company as it contracts out the IPO to the bank. In this transaction, the investment bank will make profits. It’ll price its shares at a markup rate from the price it initially paid. By doing so, the bank also assumes a substantial amount of risk.

The bank could even sustain a loss in the transaction. Although experienced analysts at the bank use their expert knowledge to price the stock as accurately as they can, the bank could lose money on the deal if it overvalues the stock for buyers. If buyers don’t purchase the IPO, the bank will be compelled to sell the stock for less than it actually paid for.

The competition in I-Banking

Since IPO projects bring a lot of money for investment banks, there’s stiff competition in investment banking. Often investment banks will compete for securing IPO projects. This can force them to increase the price they’re willing to offer to the company that’s going public. If the competition is fierce, it can bring a big blow to the bottom line of the investment bank. To offset the competition, banks often join hands while underwriting securities. By doing so, they get to suffer less risk, but the profits are shared among two or three banks as the case may be.

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Clare Louise
Clare Louise

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