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.
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:-
Table of contents
#1 – IPOs
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. 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:-
- Before the issuance of an IPO , companies 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 banks do underwritingUnderwritingThe underwriters take the financial risk of their client in return of a financial fee. Market Makers like financial institution and large banks ensure that there is enough amount of liquidity in the market by ensuring that enough trading volume is there. where it acts as a broker between investors and issuing companies.
- The investment bank works out the financial details of the IPO in the underwriting agreement.
- Post that company files the registration statement along with the underwriting agreement with SEC.
- Post-approval of IPO by SEC underwriter and issuing company decide offer priceOffer PriceOffering Price is the price that is decided by an investment banking underwriter when a company plans to go public list shares in the stock exchange for raising capital. This price is based on the future earning potential of the company, however, the price shouldn’t be too high then the shares might not be sold in full and if it is too low then the potential to raise more capital is lost. and several shares be sold.
- After issuance, the bank carries out aftermarket stabilization in which that bank analyzes aftermarket stabilization and creates a market for the stock.
- The final stage is a transition to market competition. After 25 days, the bank provides an estimate regarding the valuation and earnings of the issuing company.
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. 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.. This bank, in return, charges a commission from a company.
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#2 – Merger and Acquisitions
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. 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 help a company manageFinancial risk refers to the risk of losing funds and assets with the possibility of not being able to pay off the debt taken from creditors, banks and financial institutions. A firm may face this due to incompetent business decisions and practices, eventually leading to bankruptcy. financial riskFinancial RiskFinancial risk refers to the risk of losing funds and assets with the possibility of not being able to pay off the debt taken from creditors, banks and financial institutions. A firm may face this due to incompetent business decisions and practices, eventually leading to bankruptcy. in terms of currency, loans, liquidity, etc.
- This bank helps a company to recognize the loss area.
- This credit riskCredit RiskCredit risk is the probability of a loss owing to the borrower's failure to repay the loan or meet debt obligations. It refers to the possibility that the lender may not receive the debt's principal and an interest component, resulting in interrupted cash flow and increased cost of collection.-control credit risk investment spreads out counterparties, and banks choose stock exchanges for trading.
- There are different risks like business riskBusiness RiskBusiness risk is associated with running a business. The risk can be higher or lower from time to time. But it will be there as long as you run a business or want to operate and expand., investment risk, legal & compliance risk, and operational risk, internally controlled by an investment bank.
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. 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. , 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. 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..
#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. profit 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. .
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. 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., 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-