Investment banking is a broad term that is described by several functions including capital market intermediation and stock trading. However, both the terms that are stated above are distinct from the functions associated with commercial banking which majorly involves the acceptance of deposits and providing loans to common people.
Unlike commercial banks, investment banks primarily focused on capital formation and price setting. These are the large financial institutions that assist all the businesses (small scale or global) with capital financing and trading both.
There are many things an investment bank does which in turn uplift the economy to a better position.
Here are a bunch of questions you need to ponder:
If a company XYZ limited, is planning to go with the merger with another company? How to find out whether it’s going to benefit your company?
How does the company raise funds?
Who handles the whole documentation process or figures out the new investment strategies?
The answer is Investment Banks. Investment banks are the ones that help many small and mid companies go public so that they can increase their wealth by a large percentage. Also, they assist many companies to underwrite bond offerings and are involved in stock trading and other major investments with handsome investment amounts
What is the Need of an Investment Bank?
The need for investment banks is extremely large. For instance, the division of banking is responsible for the formation of capital for companies, governments and other entities. Also, investment banks act as an intermediary between investors and corporations. They perform several activities such as negotiation and structuring of mergers and acquisitions and many more.
The involvement of investment banks in the meeting of sellers and investors, also add liquidity to the stock market.
The actions taken by investment banks promote business growth, which in turn boost the economy. As said earlier, investment banks help companies issue stocks for the first time in the form of an IPO, make it public and allow it to trade in the capital market. They also help companies in finding large scale investors for corporate bonds to arrange debt financing.
Investment Banking offers a variety of functions by which they play a major role in uplifting the economy. Here are some of the functions performed by these banks
- IPO Launching
IPO launching – Launching an IPO cannot be done without the investment banks. An IPO or initial public offering is a way through which private corporations raise capital by issuing their shares to the public.
By issuing SME IPO’s, they gather public attention in which in turn help companies to not just create capital but also do build branding.
Going public is important for any company and therefore they select a wealthy investment bank based on few merits: quality of work, reputation, experience and more.
The foremost thing an investment bank does is draft a financial statement for the IPO which comes in an underwriting agreement.
Then, the next thing is that it files a financial statement with the SEC.
The investment bank now waits to take the approval of the SEC. Once the offer comes, it sets an offer price.
After issuing the shares, the investment bank starts an aftermath stabilization analysis and monitors the performance of shares in the public market.
The investment bank then receives a commission for its service from the organization.
Underwriting is a process where bankers sell stocks or bonds to investors so that they raise capital. For instance, a corporation takes on financial risk for a fee.
The first process of underwriting comes in when the investment bank first makes a prospectus with a price range. On seeing the price range, investors finalize a firm price.
In the next process, a book of demand is built where the prices that are already set are cleared. Finally, the funds are allocated. Here, we call it a firm’s commitment.
- Merger and Acquisition
If a company wants to do a merger, firstly it goes to an investment bank. The investment bank. An investment bank needs to perform several things during merger and acquisition:
Investment banks help in raising funds for the merger company.
Investment banks deliver the best strategy for the merger.
These banks firstly analyse the merging company, gather all the necessary information, find out its actual value and present it to you.
- Risk Management
Investment banks also help in minimizing the risks associated with the business. A business is associated with many risks such as business risk, investment risk, compliance risk, legal risk, operational risk and more. Investment banks here figure out all these risks, try to minimize them and find out how they will affect the bank.
Market risk is the most important factor an investment bank needs to figure out. For that, they need to keep an eye on critical factors such as credit risks. Investment banks set up a strong team whose major job is to do a risk assessment.
- Research the Stock Market
Research is the primary objective for any job and so is investment banks. That’s the reason investment banks do thorough stock market research such as analyzing a company’s performance, reading the financial statements, and more. Also, they always keep an eye on the stock market which in turn helps you make a profit by giving advisory services such as sales and trade.
Investment banks perform various stock market research such as fixed income research, qualitative research, equity research, macroeconomic research.
- Merchant Banking
Some investment banks offer merchant banking services in several areas such as financials, legal, marketing, and managerial divisions.
- Merchant banks do several things:
- Raising capital for a client
- Project management
- Lease services
- Maintaining and Managing Public Issue of a company.
- Special assistance to small companies and entrepreneurs.
How Does Investment Banking benefit the Economy?
Investment banks give a huge contribution to the country’s economy as investment banks help companies to generate more funds. Secondly, a commercial bank primarily focuses on transactions, investment banks, on the other hand, devise a plan for efficient business ventures.
The Bottom Line
Investment banking is very important for today’s economy. These banks perform several functions which include IPO launching through which they can raise funds as well. Also, the investment banks easily manage your assets so that they will make more and make profits.
We have a team of highly profound investment bankers that has helped many SME’s grow their business via IPO launching and M&A and venture capital.