Investment Banking 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

Principal Functions of Investment Banks

1. Raising Capital Corporate Finance is a traditional aspect of Investment banks, which involves helping customers raise funds in the Capital Market and advising on mergers and acquisitions. Generally the highest profit margins come from advising on mergers and acquisitions. Investment Bankers have had a palpable effect on the history of American business, as they often proactively meet with executives to encourage deals or expansion. 2. Brokerage Services Brokerage Services, typically involves trading and order executions on behalf of the investors. This in turn also provides liquidity to the market. These brokerages assist in the purchase and sale of stocks, bonds, and mutual funds. 3. Proprietary Trading Under Investment banking proprietary trading is what is generally used to describe a situation when a bank trades in stocks, bonds, options, commodities, or other items with its own money as opposed to its customers money, with a view to make a profit for itself. Though Investment Banks are usually defined as businesses, which assist other business in raising

money in the capital markets (by selling stocks or bonds), they are not shy of making profit for itself by engaging in trading activities. 4. Research Activities Research, is usually referred to as a division which reviews companies and writes reports about their prospects, often with buy or sell ratings. Although in theory this activity would make the most sense at a stock brokerage where the advice could be given to the brokerages customers, research has historically been performed by Investment Banks (JM Morgan Stanley, Goldman Sachs etc). The primary reason for this is because the Investment Bank must take responsibility for the quality of the company that they are underwriting Vis a Vis the prices involved to the investor. 5. Sales and Trading Often referred to as the most profitable area of an investment bank, it is usually responsible for a much larger amount of revenue than the other divisions. In the process of market making, investment banks will buy and sell stocks and bonds with the goal of making an incremental amount of money on each trade. Sales is the term for the investment banks sales force, whose primary job is to call on institutional investors to buy the stocks and bonds, underwritten by the firm. Another activity of the sales force is to call institutional investors to sell stocks, bonds,

commodities, or other things the firm might have on its books.

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

Types of Investment Banks If youre looking to find an investment bank for your business, be aware that its a decision that shouldnt be taken lightly. You cant just pick a bank and be done. While the choice of banks is plentiful, you need to think about whether your business is better suited for a generalist investment bank or a specialist investment bank. Your choice should depend heavily on the characteristics of your business, but you should know the differences between the two types of investment banks, regardless.

Both types of investment banks offer distinctive advantages for business. Below is a brief breakdown of each bank type.

Generalist Investment Banks: This type of bank is anything but general. They are very detailed and successful and tend to implement larger teams when dealing with a company that has several large transactions at the same time. With the many different processes going on, its better to have more people, and this is the biggest advantage of choosing a generalist bank over a specialist bank. Generalist banks still focus on providing clients with the best business advice possible, while handling the monetary transactions. Specialist Investment Banks: These banks are typically well versed in specific sectors and are better equipped to help smaller businesses that have a particular niche. Because of the specialized knowledge, these banks are better suited for companies looking for a way to communicate its business plans and values to buyers. Because specialist banks possess knowledge of business niches, they will typically be able to introduce companies to investors who match the business niche.

Trends in the banking industry

At the beginning of the 21st century, the biggest banks in the industrial world have become complex financial organizations that offer a wide variety of services to international markets and control billions of dollars in cash and assets. Supported by the latest technology, banks are working to identify new business niches, to develop customized services, to implement innovative strategies and to capture new market opportunities. With further globalization, consolidation, deregulation and diversification of the financial industry, the banking sector will become even more complex. Although, the banking industry does not operate in the same manner all over the world, most bankers think about corporate clients in terms of the following:

Commercial banking - banking that covers services such as cash management (money transfers, payroll services, bank reconcilement), credit services (asset-based financing, lines of credits, commercial loans or commercial real estate loans), deposit services (checking or savings account services) and foreign exchange; Investment banking - banking that covers an array of services from asset securitization, coverage of mergers, acquisitions and corporate restructuring to securities underwriting, equity private placements and placements of debt securities with institutional investors.

Over the past decade there has been an increasing convergence between the activities of investment and commercial banks, because of the deregulation of the financial sector. Today, some investment and commercial banking institutions compete directly in money market operations, private placements, project finance, bonds underwriting and financial advisory work. Furthermore, the modern banking industry has brought greater business diversification. Some banks in the industrialized world are entering into investments, underwriting of securities, portfolio management and the insurance businesses. Taken together, these changes have made banks an even more important entity in the global business community.

Raising capital by equity

Many publicly listed companies needing to raise funds for investment choose not to offer shares or issue bonds on the open markets, but instead look for capital on the private equity markets. In the former case, funding comes from a publicly listed company looking to invest in other companies that offer synergy, as well as good financial returns. In the latter, the funds come from institutional investors who invest their wealth indirectly through private equity funds private equity being a class of assets that are not publicly traded on the exchanges. Institutional investors provide such capital with the aim of achieving risk-adjusted returns that exceed those possible on the stock markets

Advantages

Raising capital through equity can be a good choice for companies that are not ready for an IPO or are unwilling to finance expansion through debt.

An equity deal means that the company has access to business experts through its investors, who can help to steer the business strategically as well as financially.

Disadvantages
Taking the equity route can lock a company into an agreement over a long time frame.

The company may have to surrender a large stake in return for investment, possibly as much as 50%, and also provide seats on the board. Investors may interfere with the companys business plan and other areas of strategic importance. With either type of equity deal, there needs to be chemistry between the counterparties. Lack of chemistry can lead to board disagreements and other problems, souring the relationship. It can be difficult for a company to extricate itself from an equity investment arrangement, depending on the terms of the deal.