CFA, Finance

Investment Banking – Full Understanding

Introduction to Investment Banking

Investment Banks: Investment banking is a special segment of banking operation that helps individuals or organizations raise capital and provide financial consultancy services to them.

Examples of Investment Banks:

Bank of America, Barclays Capital, Citigroup Investment Banking, Deutsche Bank, and JP Morgan are some of the largest investment banks in India.

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Full-service banks offer the following services:

  1. Underwriting – Capital raising and underwriting groups work between investors and companies that want to raise money or go public via the IPO process. This function serves the primary market or “new capital”.
  2. Mergers & Acquisitions (M&A) – Advisory roles for both buyers and sellers of businesses, managing the M&A process start to finish.
  3. Sales & Trading – Matching up buyers and sellers of securities in the secondary market.  Sales and trading groups in investment banking act as agents for clients and also can trade the firm’s own capital.
  4. Equity Research – The equity research group research, or “coverage”, of securities helps investors make investment decisions and supports trading of stocks.
  5. Asset Management – Managing investments for a wide range of investors including institutions and individuals, across a wide range of investment styles.

Underwriting Services in Investment Banking

Underwriting is the process of raising capital through selling stocks or bonds to investors (e.g., an initial public offing IPO) on behalf of corporations or other entities.

There are generally three types of underwriting:

  • Firm Commitment– The underwriter agrees to buy the entire issue and assume full financial responsibility for any unsold shares.
  • Best Efforts– Underwriter commits to selling as much of the issue as possible at the agreed-on offering price but can return any unsold shares to the issuer without financial responsibility.
  • All-or-None– If the entire issue cannot be sold at the offering price, the deal is called off and the issuing company receives nothing.

Advisory Services in Investment Banking

In addition to assisting companies with new issues of securities, investment banks offer advice to companies on mergers and acquisitions, divestments, major corporate restructurings, and so on. They will assist in finding merger partners and takeover targets or help companies find buyers for divisions or subsidiaries of which they want to divest themselves. They will also advise the management of companies that are themselves merger or takeover targets.

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Sales and Trading in Investment Banking

Sales and Trading (S&T) is a group at an investment bank that consists of salespeople, who call institutional investors with ideas and opportunities, and traders, who execute orders and advise clients on entering and exiting financial positions.

Equity Research in Investment Banking

Equity researchers helps to identify which stocks or assets create a better portfolio. Equity researchers are responsible for identifying patterns with current market price changes and using this information to create algorithms that identify profitable stock investment opportunities.

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Asset Management in Investment Banking

The Asset Management service is usually offered to high net-worth individuals, sovereign wealth funds, pensions and corporations. The firm will typically charge a management fee (a fixed percentage of total funds managed) and sometimes take a percentage of the profits although this blurs the line between an asset management fund and a hedge fund.

 

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