What is Investment Banking?
Investment Banking is for the creation and raising of capital for the government, companies and corporations.
Investment banks provide financial advice to issuers on the issuing and placement of stocks. They help to facilitate mergers and acquisitions, assist in the sale of securities. They also underwrite new debts and securities for corporate entities.
- Underwriting: Underwriting is a process where the banks raise capital and funds for an entity. As an underwriter, an investment bank must first understand the client’s required capital and then study the market realities. While considering the market conditions, it must take into account the investors risk-taking capacity, its target market, political and economic conditions; on this basis, an investment bank structures a public issue and opens it to the market. In most cases, the banks invest some capital in the public issue to create investor’s confidence in the issue and also cover unsold issues. Therefore, the bank needs to choose its clients wisely before offering underwriting services.
- Merger and Acquisition Advisory: This is another service provided by investment banking. They act as middlemen to help find, evaluate and complete the acquisition of a business for their clients. Investment bankers stand as advisers on both sides of the Merger and Acquisition process.
- Asset Management: This refers to managing assets on behalf of an entity. The process of asset management has a dual mandate- create an efficient bank portfolio for their client, which yields maximum returns while mitigating the risks involved. These banks serve as asset managers for government and large corporations, and they charge a commission which is a percentage of the assets.
- Equity Research: This is not the mainstay of investment banks, but it is necessary to enable high-profit ideas. Most times, they create an in-house research team whose duty is to carry out quantitative research in macroeconomics, creative analysis, political and market scenarios to identify profitable investment opportunities for their clients.
- Sales and Trading: The primary role of Investment banking here, is to facilitate the buying and selling of financial instruments and other securities between the bank and high net worth investors. They approach large investors to suggest profitable ideas and complete the trade on behalf of their clients.
An investment bank comprises private and public operations with the two divisions working independently of each other. The private operations area of the bank deal with private information. The public operation areas, such as stock investment analysis, focuses on the public.
An advisor who provides professional the services must be a licensed broker-dealer or a representative of a licensed investment bank. Before you get access to these services, your assets must be up to the minimum investment; this is because investment banks only entertain large clients and investors.