What is an Investment Bank?
Investment banks are special divisions in the banking sector that specializes in providing advisory-based financial services to help their client with large scale financial transactions. It leverages its large network and financial expertise to raise capital for its clients who are generally large corporations or high net worth individuals. From a broader perspective, investment banks play a major role in effectively channeling funds in the economy by connecting the borrowers and lenders.
The investment banks act as mediators in large-scale complex financial transactions to ensure that their clients get a fair share in the deal and remove any anomalies in the process. Investment banks are popular for providing their financial expertise to companies raising funds from the public through IPOs. In addition to valuing the company and finalising the stock price, the investment banks also act as underwriters in most cases and hedge the risk for companies to some extent.
Functions of an Investment Bank
Let’s understand the functions of an investment bank in the context of the work carried out by it.
- Initial Public Offering: Investment banks play a key role in assisting the Initial Public Offerings (IPOs). They help new organisations with good potential to raise funds from the public by offering their shares through IPOs. Investment banks have a major role to play when it comes to deciding the optimum share price by valuing the company based on their revenue and profits. Investment banks have to conduct all the due diligence and research work to find out the financial standing of the business and provide a fair valuation.
- Mergers & Acquisitions: Another important role played by investment banks can be highlighted in the mergers and acquisition deals. Mergers and acquisitions are fruitful for companies who want to reduce the competition and profit collectively from improved synergy. Mergers and acquisition can also help companies to venture into new markets and serve new customers. It helps them leverage the network, customer base and expertise of the other companies and benefit from it. The mergers and acquisition process requires a fair valuation of the companies being acquired or those who are acquiring. Investment banks act as a mediator in the merger and acquisition deals to ensure that their client’s interest is being protected.
- Advisory services: Another major function of an investment bank includes providing investment guidance to its clients. Investment banks work with big corporations and high net worth individuals and guide them on profitable investment opportunities. Generally, those investments are a little complex in nature and need professional guidance and oversight to reap profits. This includes alternative investments such as private equity, venture capitals, hedge funds, commodities, etc. Investment banks provide various advisory related services to their clients that help them improve their financial decision making.
- Market Making: Investment banks functions are generally categorised under two divisions; the advisory related services and the financing related ones. Apart from this, the investment banks also have a sales and trading division that serves the purpose of market-making. Selling and buying stocks on the exchanges also involve investment banks and they act as middlemen in the process. They buy and sell stocks frequently on the secondary exchanges whenever someone is looking to sell or buy stocks. This is why they are also responsible for market making.
The investment banking career is one of the most prestigious ones in the financial services industry and there are many who work hard to be successful investment bankers. Working in investment banking requires a lot of dedication and perseverance, you need to put in extra hours and do the job. Getting into the investment banking industry can be even harder, you can opt for an Investment banking course by reputed institutions like Imarticus Learning to boost your career prospects as it even guarantees placements with top-notch companies in addition to providing you with the required knowledge and skills.