Corporate Study Circle - Investment banking

Investment banking

You might have wondered what exactly an investment bank is and what exactly it does. In this article, I have tried to explain some details about an investment bank and its functions. In next part I will write about investment banking career.

What is an investment bank?

An investment bank is a firm that helps companies raise capital for their business by selling securities. It differs from commercial banks because it does not have checking or savings account nor does it offer loans to people. Its clients are business firms who want to raise capital for their businesses.

However companies use investment banks in a similar way as they use commercial banks. If a company needs capital, it may get a loan from a bank, or it may ask an investment bank to sell equity or debt.

Some of the major investment banks include Goldman Sachs, Merrill Lynch, Morgan Stanley Dean Witter, Salomon Smith Barney, Donaldson, Lufkin & Jenrette, J.P. Morgan and Lehman Brothers etc.

Contrary to popular belief, investment bankers are not brokers. Brokers sell securities that a firm underwrites and manage the portfolios of retail investors. Brokers are just a part of whole investment banking system.

The main services offered by an investment bank are

Merger and acquisitions (M&A) advisory

Raising capital or financing by issuing securities

General advisory services

Departments in an Investment bank

Generally, the breakdown of an investment bank includes the following areas:

Corporate Finance

Corporate finance generally performs two different functions:

1) Mergers and acquisitions advisory and 2) Underwriting.

On the mergers and acquisitions (M&A) advising side of corporate finance, bankers assist in negotiating and structuring a merger between two companies. If, for example, a company wants to buy another firm, then an investment bank will help finalize the purchase price, structure the deal, and generally ensure a smooth transaction. The underwriting function within corporate finance involves shepherding the process of raising capital for a company. In the investment banking world, capital can be raised by selling either stocks or bonds to investors.

Sales

Sales is another core component of any investment bank. Salespeople take the form of: 1) the classic retail broker, 2) the institutional salesperson, or 3) the private client service representative.

Brokers deal with individual investors and sell stocks and stock advice to the common man. Institutional salespeople deal with large institutional investors. Institutional investors are those who manage large groups of assets, for example pension funds or mutual funds.

Private Client Service (PCS) representatives lie somewhere between retail brokers and institutional salespeople. They provide brokerage and money management services for extremely wealthy individuals. Salespeople make money through commissions on trades made through their firms.

Trading

Traders also provide a vital role for the investment bank. Traders facilitate the buying and selling of stock, bonds, or other securities such as currencies, either by carrying an inventory of securities for sale or by executing a given trade for a client.

Research

Research analysts follow stocks and bonds and make recommendations on whether to buy, sell, or hold those securities. Stock analysts (known as equity analysts) typically focus on one industry and will cover up to 20 companies' stocks at any given time. Some research analysts work on the fixed income side and will cover a particular segment, such as high yield bonds or U.S. Treasury bonds. Salespeople within the I-bank utilize research published by analysts to convince their clients to buy or sell securities through their firm. Corporate finance bankers rely on research analysts to be experts in the industry in which they are working. Reputable research analysts can generate substantial corporate finance business as well as substantial trading activity, and thus are an integral part of any investment bank.


Bibliography: Trupti Desai's blogpage

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Corporate Study Team
IMERT, Pune