Investment banks are a type of financial organisation that helps corporations, governments, and institutions raise capital. Unlike retail banks, which can work with individual customers on products like deposits and loans, investment banks help firms, governments, and institutions raise cash.
“When you go to the bank to borrow money for a home purchase, they connect people who have savings in the bank with borrowers,” Emil N. Siriwardane, Finnegan Family Associate Professor of Business Administration at Harvard Business School, explains. As he points out, investment banking essentially performs that function for businesses.
These financial institutions have been around for quite some time. Early investment bankers are supposed to have started out as traders of commodities such as spices and cotton. These merchants might then help with product manufacture and distribution.
The phrase “investment bank” became increasingly prevalent a few decades later, in the nineteenth century. JPMorgan Chase & Co., a global financial services corporation, can trace its roots back to 1799 in New York City, citing “legacy firms.” Early investment banks raised cash through selling railroad shares and organising firm buyouts, among other things.
What are the functions of investment banks?
Investment banks serve as advisors and mediators between firms, other entities, and investors in order to raise funds. Mergers and acquisitions, underwriting, private equity, and venture capital are all areas where these banks can specialise.
According to David Erickson, a senior fellow and lecturer in the Finance Department at The Wharton School and co-director of the Stevens Center for Innovation in Finance, bankers can focus on certain sectors, such as health care and technology, as well as sectors based on size.
So-called “boutique banks,” particularly regional boutique banks, can be smaller and more independent when it comes to classification. According to Erickson, they might also specialise in specialised areas of investment banking. Bulge banks, on the other hand, are enormous worldwide corporations with well-known names. Consider Goldman Sachs, JPMorgan Chase & Co, Morgan Stanley, and other financial institutions.
Also keep in mind that an investment bank and an investment banking division are not the same thing. Underwriting, mergers and acquisitions, sales and trading, and stock research are among services that full-service investment banks can provide. Meanwhile, a bank’s investment banking branch provides underwriting and mergers and acquisitions advising services.
Investment bankers’ function
Investment banks have a hierarchy and can employ a wide range of employees. Investment banking analysts, investment banking associates, vice presidents, directors or senior vice presidents, and managing directors are all examples of employees.
These employees work on a wide range of tasks and transactions and may work long hours. However, these specialists are well compensated for their abilities, with yearly salaries ranging from the six figures for young personnel to the millions for senior staff. And, as Erikson points out, the job can be beneficial both personally and professionally.
Investment bankers can also work on a variety of initiatives. “Banks help companies that need money get it,” Siriwardane says, stressing that there are various ways for banks to raise money within that system.
“A typical investment banker will work with a group of companies,” Erickson continues. Then they’ll figure out what firms require and look into funding options.
These financial experts may assist with a variety of tasks, including:
Equity investment. Private equity, or private finance, such as funds from a high-net-worth individual or corporation, can be part of this capital-raising process. Another approach to acquire equity financing is through venture capital investments, which involve shareholders financing startups in exchange for a stake in the company. Investment banks can connect businesses with private investors or venture money, as well as handle the process of selling stock to the general public through an initial public offering, or IPO. If you’ve ever bought stocks or followed the stock market, you may recall how businesses like Facebook and Google received billions of dollars through initial public offerings (IPOs). Companies can access this type of funding. might share earnings with investors and seek their advice on decisions.
Underwriting. Investment banks can act as intermediaries between investors and firms looking to raise capital or go public. The investment bank conducts research and assesses risk before pricing, underwriting, and selling the new securities. Investment banks benefit on the difference between the price at which securities are purchased and the price at which they are sold. In exchange for a piece of the pie, underwriting can involve a bank taking a financial risk in the project. For example, when investment banks provide underwriting, they can sometimes arrange for debt to be taken up by investors while keeping a portion of the debt for themselves.
“Skin in the game,” which refers to a specific type of debt.
Debt capital. Investment banks will assist companies in this process by assisting them in obtaining funds, such as a loan. The corporations then agree to repay the money with interest over time. Because the lender does not own the company it is supporting and consequently does not have a role in corporate decisions, this procedure differs from equity financing. The commercial partnership might stop once the debt is paid off. However, while the corporation is repaying the debt, this method may impose some constraints.
Trading and selling This job entails serving as a middleman between secondary market buyers and sellers of securities. The Corporate Finance Institute acknowledges that banks can collaborate with mutual funds, hedge funds, and other trading groups for this function, stating that these trading groups “serve as agents for clients and can also trade the firm’s own capital.”
Buyouts with leverage. According to Siriwardane, a company can be acquired using largely borrowed funds in this type of transaction. The buyer, such as a private equity group, can put some money down and borrow the rest to complete the transaction. Sidwardane compares the company’s approach to when a consumer uses a mortgage broker to purchase a property.
The financial conclusion
Investment banking is a branch of banking that focuses on helping businesses, governments, and other organisations raise or create capital. Investment bankers are in charge of trend analysis, risk assessment, strategic advising, and project management.
If you want to work in this industry, you should be aware of the banks’ duties and the effort required to fulfil corporate objectives. If you’re looking to raise funds for your own business or entity, it’s also crucial to know how an investment bank may advise and manage your project.