What is investment banking and its different function

What is investment banking and its different function

If you’ve recently been thrust into the world of adulthood, you probably would have heard of investments and how important they can be. It definitely isn’t wrong. Investments can be a very useful tool when planning for one’s future plans. So, is investment banking a good way to add to our investment plan?

An investment bank, by definition, is any company that helps its clients in making and securing long and often complicated transactions. This can come in many forms; from advice on the market price of a company to acquisition, mergers, and sales. Some of the top brands of investment banking have become household names, they include Barclays, JP Morgan, Citibank, etc.

The banks may charge a commission for every successful deal they help facilitate. These range from small stock share trading to huge mergers and acquisitions that affect the global market. This is an oversimplified definition. Investment banking is one of the most complicated financial mechanisms in work today. Below is a brief overview on some things that you would need to know about investment banking.

Different functions of investment banking

Mergers and acquisition

This is one branch of investment banking that has suffered in the past due to the various periods of financial depression. However, it manages to make a comeback every time. Mergers and acquisition deals with the various aspects that come into play during sale of companies and/or their assets. Some companies even have fairness options and help in the structure of the transaction to ensure the fairest deal for all companies involved.

Mergers and acquisition is often a delicate wing of financial handling and requires that both sides make a profit that is favorable to them. In a way, the bank is required to cater to both the companies, while serving one as its client.

Commercial banking

Post the 90’s, investment banks have also started to provide their customers with the run-of-the-mill banking services, including retail brokerage. This couldn’t be done before, due to laws that regulated the roles of commercial banks and Investment banks so as to have a fair division of work.

You can now invest personally, instead of relying on institutional representation and businesses, with investment banks.

Security underwriting

This is the most important function carried out by investment banks. Investment banks serve as a buffer between investors and the corporations they are working for. They work to raise investments for the securities being issued by the corporation or government.

This whole process relies on risk evaluation and management on the part of the underwriter. This becomes important later on, so as to set fair and accurate rates that cover the cost for the insurance policyholders.

Middle bank services

Different security measures come in place when investment banks are dealing with professional clients. These clients include other banks, finance centers and divisions, and insurance companies. The investment bank keeps a tab on the liquidity of the assets of its customer in order to keep the company out of any financial or legal troubles. This information is also later used to decide the buying and selling of stocks and to dictate the purchasing power of the company.

Role of advisors

Finally, above all else, investment banks function as advisors for infant companies looking to make a strong financial footing in the market or large ones looking to distribute the weight of their shares. Investment banks rely on sophisticated and versatile models of finance to understand and cater to the needs of all kinds of companies.

How investment banks work

One must understand that investment banks aren’t your run-of-the-mill banking institutions. Individuals can do business with such banks on the primary level. However, these banks exist to make the high finance sale market easier to navigate.

It is a great tool for those looking to invest in the stock market, which is susceptible to the whims of the market. In such cases, profit is made by taking calculated risks and a regulated market. Investment banks serve as buffers between companies looking to sell their stocks and investors willing to buy them. Depending on your purpose, you will either fall on the buy side or the sell side of investment banking.

Buy side of investment banking: This is the side that most individual investors are looking to get to. Investment banks can greatly help you in narrowing your options in stock purchasing or in managing a mutual funds. It also provides ample security when the individual is investing or trading in security bonds or stocks.

Sell side of investment banking: The sell side is preferred by IPOs who’re looking to share their bonds with the public. The investment bank here serves as a medium of contact between interested investors and the company selling the shares (known as the “issuer”).