What is Investment Banking?

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What is investment banking

Investment banking is a key division of the banking domain. Under investment banking vertical, banks perform various financial services like raising capital, security underwriting, mergers/acquisitions, trading and commercial banking. Investment banks earn their profit by charging fees for providing these financial services and other business advice. Essentially, investment banks act as middlemen between companies that want to issue securities and the general public who is the buyer.

Let us look at each of these financial functions individually so as to get a clear idea of investment banking tasks.

Functions of investment banks

Raising capital and security underwriting

Investment banks act as middlemen between companies that issue securities and potential buyers of these securities. They assess the profit and risk associated with issue of new bonds and then determine the share value to price and then sell the bonds to public. Banks also ensure that before these stocks hit the market there are buyers (investors, mutual funds and pension funds) commit to buying these.

Sales, trading and equity research

Banks enable trading of securities by matching buyer-seller ratio. Banks buy securities themselves also to facilitate trading of equities. Institutional investors like mutual funds, pension funds etc. use investment banks to trade securities. These banks also facilitate trading of securities that are underwritten by the bank in secondary markets.

Mergers and acquisitions

Banks advice buying and selling corporates on business negotiation, pricing etc. Investment banks employ this role when a company decides to merge or overtake another company. These companies are also advised on pricing and structuring of transactions. The fee structure for this function of investment banks is way higher than regular services and as such mergers and acquisitions are an important means of income for investment banks.

Retail and commercial banking

Investment banks also provide regular retail and commercial banking services. These involve offering of financial products and services to individual customers as well as business houses. This means that in case you are an individual customer you can open checking or savings account with the bank and the same holds true even for business customers.

Front office and back office

While back office generally deals in operations of the bank, front office is mostly about generating revenue. By this definition, functions like mergers and acquisitions, equity trading etc. fall under the front office section. Back office functions include technology related work and operations of the investment banks.

Investment Banking Industry Profile

There are various associations present globally which control the investment banking structure and functions. In the United States, Securities Industry and Financial Markets Association, SIFMA is present while Europe has the European Forum of Securities Association. Similarly, China has Securities Association of China. These associations set the industry standard, functions and publish statistics pertaining to investment banks.

Top 5 investment banks of the world

Here is a list of 5 of the most popular investment banks of the world.

  • J.P. Morgan
  • Bank of America
  • Goldman Sachs
  • Morgan Stanley
  • Citigroup

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