Introduction To Investment Banking And Its Services
What Is Investment Banking?Investment banking is a special division or segment of a bank or a financial institution that helps governments, corporations, and institutions in raising capital in many ways and guides them in executing large & complex financial transactions through appropriate financial consultancy services. In other words, the concept of investment banking revolves around the creation of capital and managing several financial aspects of huge projects for its clients.
What Do Investment Bankers Do?The primary role of investment bankers is acting as intermediaries between corporations (security issuers) & investors and providing them aid in underwriting (capital raising), merger & acquisition (M&A), Sales & trading of securities, asset management, and many more advisory services. These investment banking service providers are the most experienced & expert professionals who help clients carry out several financial projects successfully with significant returns & earn profit by charging fees and commissions for their rendered services. They are employed by investment banks to help clients raise capital & manage their large projects by identifying risks associated with the projects.
What Are The Types Of Investment Banking Services?The concept of investment banking is very wide that involves different purposes for business entities. It includes different types of investment banking services to help them make more profit and restructure their financial stability. Let’s understand how investment bankers help their clients:
Underwriting (Capital Raising Services)The big question is how investment bankers help you raise/invest your capital? Well, this is where the concept of underwriting comes into the scenario. It is one of the main segments of a bank’s division where the bankers help businesses raise money/capital by selling their stocks or bonds to the investors. Every business needs money to operate & expand and underwriting is a way to market business among leading investors through Initial Public Offering (IPO) in the market.
The organizations can use raised funds to achieve a variety of purposes ranging from acquiring a new firm or paying off its debts to expanding business operations and financing for particular projects etc. These raised funds can include a combination of debt, equity, and hybrid securities such as convertible debts, etc. To raise capital, the investment bankers first plan the public issue by considering the business’s requirements. They evaluate the current market conditions and finally launch the public issue.
Types of Underwriting:1. Fully Committed - The underwriter ie. the investment banker agrees to buy the entire issue and takes full responsibility for unsold shares.
2. Maximum Efforts - Underwriters attempt to sell as much issue as possible at the agreed prices but can return any unsold shares to the issuer without bearing any responsibility.
3. All or None -If none of the shares are sold at the offering price, the deal is canceled.
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M&A Advisory ServicesThis is the process where the banks help their clients discover, analyze and make acquisitions of businesses throughout the process. Various types of transactions take place in M&A Advisory Services such as Mergers, Acquisitions, Tender Offers, Leveraged Buyouts, Consolidations, etc. The key function of the banks is using their extensive networks and bringing opportunities to the clients. Since there are two entities involved in an M&A transaction, one is a Buy-side company and another is a Sell-side company. Bankers advise on both sides by analyzing the nature of M&A for a client's business. If it is profitable, it calculates the value of the company that the client wants to buy and negotiates the deal for both parties. For this, investment banking services charge a percentage of the value of the M&A deals as their fees.
Sales & TradingThe primary role of investment banking under “Sales & Trading” is handling buying & selling of securities and other financial instruments on behalf of their clients. They conduct deep market research, suggest profitable trading to clients, and execute complete trading procedures. In return, they charge commission or brokerage. You need to understand one thing that the transactions executed by investment bankers are way different from brokerage houses. For example, these investment banks only consider large investors, unlike brokerage houses that work for small investors too. Plus, the transactions done by investment bankers are inspired by the advice given by banks while brokerage houses work as investors ask them.
Asset Management ServicesAsset Management is another primary function of investment bankers where they provide their personalized Asset Management Services to their clients including large insurance companies, or government PF departments, etc. They create an impressive portfolio for their clients to attract maximum returns for a certain risk. As a commission, they charge a percentage of the asset under management.
General Advisory Services:General Advisory Services include strategic planning, research, business valuations, assisting in restructuring financial stability, and many more. These services help investment bankers to come up with creative & result-oriented ideas for their clients.
Now we can conclude that investment banking is a large and complex concept but is also essential for businesses with large amounts of capital.