Investment Banking Functions

Investment Banking Tutorials

Functions of Investment Banking

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

It provides all type 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

source: wsj.com

This investment banking function i.e. IPO is an initial public offering wherein a company hires an investment bank to issue IPO.

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

Before issuance of IPO company hire an investment bank. This bank is chosen based on different criteria like market reputation, industrial experience, quality of research and distribution channels etc.
Selected bank do underwriting process where it acts as a broker between investors and issuing company.
Investment bank works out on financial detail of IPO in the underwriting agreement.
Post that company files registration statement along with underwriting agreement with SEC.
Post-approval of IPO by SEC underwriter and issuing company decide offer price and a number of shares to be sold.
After issuance, the bank carries out after markets stabilization in which that bank analyze aftermarket stabilization and create a market for the stock.
The final stage is a transition to market competition, After 25 days period, the bank provides an estimate regarding valuation and earning of issuing company.

Investment bank helps a company to set everything and list IPO in a stock exchange. IPO is one of the major investment banking functions. This bank in return charges commission from a company.

#2 – Merger and Acquisitions

source: businessinsider.in

Merger and Acquisitions is the area of corporate finances, management, and strategy dealing with purchasing or joining with other companies. An investment bank in return charges fees for M&A. For M&A company hires a bank for merger and acquisitions. Following steps are taken for M&A by investment banks.

There is two type of role in M&A of investment bank they are seller representation or buyer representation.
One important role in M&A is a valuation of a company. The bank calculates the actual value of a company.
Investment bank builds their strategy for M&A of two companies.
The investment bank also does financial provisioning for a company as for M&A company will need lots of funds. It helps a company in raising fund for M&A.
The main role of a bank is to issue new securities to market.

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

#3 – Risk Management

Risk Management from the name itself it is clear that its management of risk involves, it is 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 bank helps a company to manage financial risk in term of currency, loans, liquidity etc.
This bank helps a company to recognize loss area.
This bank analyzes the market and credit risk. To control credit risk investment spreads out counterparties and bank choose standard exchange for trading.
There are different risks like business risk, investment risk, legal & compliance risk and operational risk which are internally controlled by an investment bank.

Risk management is done at every level by investment banks as it highlights what are risks involve and how it can be handled.

#4 – Research

This equity research investment banking function is one of the most important investment banking function is research. This research helps provide a rating to company help investor to take a decision of investment. Research reports tell whether to buy, sell or to hold the base on a rating of a company. Through this one can know worthiness of the company. Research is done by analyzing and comparing various report and performance report of the company. Investment bank primary work is research and these researches are of multiple types like equity research, fixed income research, macroeconomic research, qualitative research etc. Investment bank shares these reports with clients which helps an investor to generate profit through trading and sales.

#5 – Structuring of Derivatives

For this Investment banking function i.e. structuring of derivatives, investment bank needs a strong technical team working of such a complex structure of derivatives. Derivatives product offer a high rate of return and good margin hence a lot of risks is involved with it. Investment bank prepares these derivatives with a strategy based on a single as well as multiple securities.

This bank adds features to it like in bonds it provides future and option derivative etc. Investment bank designs securities with different derivatives options. The main reason to design such product is to attract investors and to increase profit margin.

There is another derivative also available in the market, it helps to generate a good return to investors.

#6 – Merchant Banking

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

Merchant banking has 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

There are multiple other services provided by investment banks 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 to trade various securities. Investment bank prepares reports based on company performance and through this it investment bank makes a decision on financial securities. Investment advice is provided based on the client’s objective, client’s risk appetite, investment amount and time period. Based on customer segment investment management is divided like Private clients, Private wealth management, wealth management. Here, investment bank manages a portfolio of customers and also provides tips to investors whether to sell stocks or to buy stocks or to hold stocks.