An investment bank is a financial institution which raises capital, trades securities, and manages corporate mergers and acquisitions. Another term used for investment banking is corporate finance.
Investment banks work for companies and governments, and profit from them by raising money through the issuance and selling of securities in capital markets (both equity and debt) and insuring bonds (for example selling credit default swaps), and providing the necessary advice on transactions such as mergers and acquisitions. Most of investment banks provide strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, like the trading of derivatives, commodity, fixed income, foreign exchange, and equity securities.
Investment banking is a form of banking which finances the capital requirements of enterprises. Investment banking assists as it performs IPOs, private placement and bond offerings, acts as broker and helps in carrying out mergers and acquisitions.
An Investment Banker can be considered as a total solutions provider for any corporate, desirous of mobilizing its capital. The services provided range from investment research to investor service on the one hand and from preparation of the offer documents to legal compliances & post issue monitoring on the other. A long lasting relationship exists between the Issuer Company and the Investment Banker.
Functions of Investment Banking:
Investment banks carry out multilateral functions. Some of the most important functions of investment banking are as follows:
- Investment banking helps public and private corporations in issuance of securities in the primary market. They also act as intermediaries in trading for clients.
- Investment banking provides financial advice to investors and helps them by assisting in purchasing and trading securities as well as managing financial assets
- Investment banking differs from commercial banking as investment banks don't accept deposits neither do they grant retail loans.
- Small firms which provide services of investment banking are called boutiques. They mainly specialize in bond trading, providing technical analysis or program trading as well as advising for mergers and acquisitions
Core activities of Investment Banking
- Investment banking: is the traditional aspect of investment banks that involves helping customers raise funds in the capital markets and advise them on mergers and acquisitions. Investment banking can also involve subscribing investors to a security issuance, negotiating with a merger target and coordinating with bidders.
- Sales and trading: Depending on the needs of the bank and its clients, the main function of a large investment bank is buying and selling products. In market making, the traders will buy and sell securities or financial products with the goal of earning an incremental amount of money on every trade. Sales is the term that is used for the sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas and take orders
- Research: is the division of investment banks which reviews companies and makes reports about their prospects, often with "buy" or "sell" ratings. Although the research division generates no revenue, its resources can be used to assist traders in trading, can be used by the sales force in suggesting ideas to the customers, and by the investment bankers for covering their clients.