What distinguishes investment banks from retail and commercial banks?
Commercial banks perform the same thing as retail banks, except their depositors are businesses rather than individuals. Deposits are not accepted by investment banks. Instead, one of its main operations is to raise capital by selling’securities’ (such as shares or bonds) to investors, such as high-net-worth individuals and pension funds.
The earnings from these sales assist businesses, governments, and entrepreneurs in financing large projects that require a large sum of money up front, such as research and development or expansion into a new region or market. Clients of investment banks are typically larger or more sophisticated organisations with more complex finance needs than clients of commercial banks.
In a nutshell, investment banks act as intermediaries between people who have money and those who have ideas that want funding. They make money work for them by channelling it into projects.
What are the responsibilities of investment bankers?
Investment banks offer a variety of services that differ from one company to the next. One of an investment bank’s main functions is to help clients raise money by locating investors, but they also have a separate purpose of providing objective financial advice to businesses, which will be discussed further below.
Other services that investment banks generally provide include:
- Investors can use research to help them decide which assets to buy.
- new forms of securities being developed
- brokerage — assisting clients in trading with one another.
- Instead of recruiting investors, the bank invests its own money in initiatives through private equity.
Some investment banks are subsidiaries of larger retail or commercial banks (for example, Barclays), whereas others offer additional services such as asset management in addition to investment banking.
The link between investors and businesses
When a bank’s client requires additional funds, one method the bank can assist is by providing a loan or bond that must be repaid with interest — this is known as debt financing. It functions similarly to a retail bank granting you a mortgage to purchase a home. The bank considers the amount and purpose of funding the client requires, as well as their credit history and current market conditions. This information aids the bank in determining how much money investors are willing to put up. Investors profit from the loan or bond’s interest payments, while the receiving organisation benefits from a lump sum that may be paid back over time.
The relationship between businesses and investors
When a bank’s client needs more money, one way the bank might help is by offering a loan or bond that must be repaid with interest – this is known as debt financing. It works similarly to a retail bank that gives you a mortgage to buy a house. The bank takes into account the quantity and purpose of the funding, as well as the client’s credit history and current market conditions. The bank uses this information to figure out how much money investors are willing to put up. The interest payments on the loan or bond benefit investors, while the receiving organisation receives a lump sum that can be paid back over time.
Investment banks also provide advise to businesses for which they charge a fee. Mergers and acquisitions is one of the topics they advise on (M&As). When it comes to M&A, consider the following scenarios:
A business is looking to buy or merge with another (for example, it might not have a strong presence in a certain geographical area and decide it would be best to acquire an existing company in that country to expand quickly as well as gaining funds and complementary knowledge)
- A business is considering selling a subsidiary.
- a business owner is trying to sell their company
An investment bank would assist the company in determining how to approach the other company, how to structure the transaction, what a fair price to pay, and how to fund the purchase.
Another example of investment banks’ financial advice role is initial public offerings (IPOs). An initial public offering (IPO) permits a company to be listed on a stock exchange, allowing private individuals and organisations to readily acquire and sell shares (online, for example). Investors who want to buy shares in a privately held firm that hasn’t done an IPO must contact the company directly to negotiate a price. Being publicly traded allows a company to grow more quickly. Investment bankers assist a firm in becoming publicly traded, which includes all aspects of the process.
What impact does investment banking have on society?
Unlike other financial fields such as retail banking or insurance, most regular individuals are unlikely to have had any direct experience with an investment bank. Investment banks, on the other hand, have an indirect impact on most aspects of our lives because they advise and operate on behalf of a wide range of organisations.
Companies, government agencies, institutions (including pension funds), entrepreneurs, and business families are among their clientele, all of whom have a significant impact on our lives. Clients of investment banks give us with products and services such as clothing, internet, and transportation, and they may even hire us or others we know. Banks also collaborate with investors, such as pension funds, whose performance has an impact on the value of our pensions. Investment banks’ purpose in society is to provide sound advice and services to organisations that have an impact on everyone’s life, allowing them to develop and thrive.