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Investment Banking

Investment Banking

What is an Investment Bank?

It is neither Investment banking nor I-banking, as it is often called. It is the term used to describe the business of raising capital for companies. Capital essentially means money. Companies need cash in order to grow and expand their businesses; Investment banks sell securities to public investors in order to raise the cash. These securities can come in the form of stocks or bonds. Thus Investment banks are essentially financial intermediaries, who assist their clients in raising capital either by underwriting their shares or bonds or by acting as an agent in the issuance of securities.

Please note that Investment banking isn’t one specific service or function. It is an umbrella term for a range of activities including underwriting, selling, and trading securities (stocks and bonds); providing financial advisory services, such as mergers and acquisition advice;divestitures, private equity syndication, IPO advisory and managing assets.

The Players:

The biggest investment banks in global scenario include Goldman Sachs, Bank of America Merrill Lynch, Morgan Stanley Dean Witter, Salomon Smith Barney, Donaldson, Lufkin & Jenrette, Credit Suisse, Deutsche Bank, Citi, Barclays Capital, J.P. Morgan and Barings (Lehman Brothers), among others.

The Game:

Generally, the breakdown of an investment bank includes the following areas:

Corporate Finance:

The bread and butter of a traditional investment bank, corporate finance, generally perform two different functions:

1) Mergers and acquisitions advisory and

2) Underwriting.

On the mergers and acquisitions (M&A) advising side of corporate finance, bankers assist in negotiating and structuring a merger between two companies. If, for example, a company wants to buy another firm, then an investment bank will help finalize the purchase price by coordinating with the bidders, performing due diligence, structuring the deal, negotiating with the merger target and generally ensuring a smooth transaction.

Mergers and acquisition advice include buy-side and sell-side advice where competent buy-side analysts and sell-side analysts are appointed by the Investment banking companies to advice their clients on lucrative merger targets in case a firm wants to buy another firm and potential purchasing companies if a firm wants to sell its assets.

The traditional investment banking world is considered the sell-side of the securities industry.

Why? Investment banks create stocks and bonds, and sell these to investors. Sell is the key word, as I-banks continually sell their firms’ capabilities to generate corporate finance business. Who are the buyers of public stocks and bonds? They are individual investors (you and me) and institutional investors, firms like Fidelity and Vanguard. The universe of institutional investors is appropriately called the buy-side of the securities industry.The underwriting function within corporate finance involves shepherding the process of raising capital for a company. In the investment banking world, capital can be raised by selling either stocks or bonds to the investors.

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