Investment Banking Functions

Updated on April 4, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Functions of Investment Banking

Investment Banks perform various economic functions by offering different financial services to their clients, such as helping the corporations find the investor for obtaining the debt finance, underwriting the stock issues, working as the financial advisor, handling the mergers and acquisitions, etc.

An investment bank is like a middleman between investor and issuer and helps clients raise money through debt and equity offering. Some investment banks are JP Morgan Chase, Goldman Sachs, Credit Suisse, Morgan Stanley, etc.

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Investment Banking Functions (wallstreetmojo.com)

It provides all types of financial services. Below listed are the top 7 investment banking functions –

There are multiple Investment banking functions, and they are as follows:-

#1 – IPOs

Investment Banking Functions - IPO

source: wsj.com

This investment banking function, i.e., IPOIPOAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.read more is an initial public offering wherein a company hires an investment bank to issue an IPO.

Below are the steps followed by a company for its IPO:-

IPO is one of the major investment banking functions. Investment bank helps a company set everything and list an IPO in aStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more stock exchangeStock ExchangeStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more. This bank, in return, charges a commission from a company.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

#2 – Merger and Acquisitions

Investment Banking Functions - M&A

source: businessinsider.in

Merger and AcquisitionsMerger And AcquisitionsMergers and acquisitions (M&A) are collaborations between two or more firms. In a merger, two or more companies functioning at the same level combine to create a new business entity. In an acquisition, a larger organization buys a smaller business entity for expansion.read more are corporate finances, management, and strategy dealing with purchasing or joining other companies. An investment bank, in return, charges fees for M&A. M&A company hires a bank for mergers and acquisitions. The following steps are taken for M&A by investment banks.

  • There are two types of roles in M & M&A of an investment bank: seller representation and buyer representation.
  • A critical role in M&A is the valuation of a company. The bank calculates the actual value of a company.
  • Investment bank builds its strategy for M&A of two companies.
  • The investment bank also does financial provisioning for a company as M & M&A companies will need lots of funds. It helps a company in raising funds for M&A.
  • The main role is to issue new securities to the market.

This investment banking function helps a small firm to project itself and design a merger once a suitable target is found. It helps in the merger’s success, which is all done with the help of an investment bank.

#3 – Risk Management

From the name itself, Risk Management is clear that its risk management involves a continuous process as capital is involved. It set a limit to avoid loss in trade. Investment banks help a company in the following ways:-

Investment banks do risk management at every level as it highlights the risks and how they can be handled.

#4 – Research

This equity research investment banking function is one of the most important investment banking functions. This research helps provide a rating to the company to help investors decide on investment. Research reports tell whether to buy, sell, or hold based on a company’s rating. Through this, one can know the worthiness of the company. Research is done by analyzing and comparing various company reports and performance reports. Investment banks’ primary work is research, and these researches are of multiple types likeEquity Research refers to the study of a business, i.e., analyzing a company's financials, performing Ratio Analysis, Financial forecasting in Excel (Financial Modeling), & exploring scenarios to make insightful BUY/HOLD/SELL stock investment recommendations. Moreover, the Equity Research Analysts discuss their findings & details in the Equity Research Reports. read more equity researchEquity ResearchEquity Research refers to the study of a business, i.e., analyzing a company's financials, performing Ratio Analysis, Financial forecasting in Excel (Financial Modeling), & exploring scenarios to make insightful BUY/HOLD/SELL stock investment recommendations. Moreover, the Equity Research Analysts discuss their findings & details in the Equity Research Reports. read more, fixed income research, macroeconomic research, qualitative research, etc. Investment banks share these reports with clients, which helps an investor to generate profit throughOne of the main functions of an investment bank in the country is sales and trading, in which the investment banking sales team pitches clients for trading ideas and the traders team executes activities related to the purchase and sale of securities and other financial instruments in the market for itself or on behalf of its clients.read more trading and salesTrading And SalesOne of the main functions of an investment bank in the country is sales and trading, in which the investment banking sales team pitches clients for trading ideas and the traders team executes activities related to the purchase and sale of securities and other financial instruments in the market for itself or on behalf of its clients.read more.

#5 – Structuring of Derivatives

Derivatives products offer a high rate of return and a good margin; hence, many risks are involved. Investment banks prepare these derivatives with a strategy based on single and multiple securities.

For this Investment banking function, i.e., structuring derivatives, investment banks need a strong technical team working on such a complex structure of derivatives.

Investment banks design securities with different derivatives options. The main reason to design such a product is to attract investors and increase the Profit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read moreprofit marginProfit MarginProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more.

This bank adds features to it, like in bonds. It provides future and options derivatives etc.

Another derivative is also available in the market; it helps generate a good return to investors.

#6 – Merchant Banking

This investment banking function is one of the personal activities of the investment bank where the bank also does consultancy for their clients. It acts as a financial engineer for business. They provide consultancy in financial, marketing, legal, and managerial matters.

Merchant bankingMerchant BankingMerchant Bank is a company that provides services like fundraising activities like IPOs, FPOs, loans, underwriting. They only deal with companies and businesses.read more has the below functions:-

  • Raising finance for a client
  • Broker in Stock exchange
  • Project management
  • Money market operations
  • Leasing service
  • Portfolio management
  • Handling government consent for industrial projects
  • Managing public issue of a company
  • Special assistance to small companies and entrepreneurs

Investment banks provide multiple other services to their clients. This bank charges consultancy fees from investors.

# 7 – Investment management

This investment banking function is a core job of an investment bank to guide the investor to purchase, manage his portfolio, and trade various securities. Investment banks prepare reports based on company performance, and through this investment bank decides on financial securities. Investment advice is based on the client’s objective, risk appetiteRisk AppetiteRisk appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation.read more, investment amount, and period.  Based on the customer segment, investment management is divided into Private clients, Private wealth management, wealth management. Here, an investment bank manages a portfolio of customers and provides tips to investors on whether to sell stocks, buy stocks, or hold stocks.

This has been a guide to Investment Banking Functions. Here we discuss the top 7 functions of Investment Banking, including IPOs, M&A, Research, Risk Management, Structuring Derivatives, Investment Banking, and more. You may also take a look at the below articles related to investment banking-