There are several different types of banks and institutions out there. By knowing what these banks do and how they differ, you’ll be able to improve your financial literacy and make better investing decisions.
So, what’s an investment bank? And what do investment banks do?
An investment bank essentially acts as an intermediary institution that performs a variety of services. The majority of investment banks specialize in complex and big financial transactions. These kinds of banks help businesses make financial decisions and raise the capital they need.
But there’s a lot more to it than just that. Are you interested in learning more? If so, then continue reading and we’ll walk you through everything you need to know!
How Do Investment Bank Works?
There are two main divisions of investment banks worth knowing about. The first is the advisory division, which is paid a fee for their work. There is also the trading division, which realizes losses or profits based on their performance in the market.
A person who works in an investment bank might have a career as a salesperson, trader, or financial advisor. While a career at an investment bank could be lucrative, it typically also involves a lot of stress and long working hours.
Investment banks are best known for their financial intermediary roles. This means that they help businesses issue new shares of stock in an initial public offering (IPO). They also assist businesses to obtain debt financing by attracting investors for corporate bonds.
The role of the investment bank starts with counseling before the underwriting process even starts. It then continues after the securities are distributed as they continue to offer advice.
Investment banks also look at the accuracy of the corporation’s financial statements and they write papers that explain the offering to investors. The clientele of investment banks tends to consist of:
- hedge funds
- governments
- corporations
- other banks
- pension funds
Many investment banks tend to use their size to their advantage. The more well-connected an investment bank is, the more likely it’s going to profit. It does this because it’s better able to match sellers and buyers.
Many large investment banks have customers all over the world.
What Do Investment Banks Do?
Investment banks perform a variety of functions. Often, they will act as the financial advisor to powerful institutional investors. An investment bank is supposed to be a trusted partner that provides strategic and useful advice on all kinds of financial matters.
They’re able to do this by combining their ability to evaluate and spot investment challenges and opportunities along with understanding the desires of their customers.
Investment banks also deal with mergers and acquisitions. During this process, the job of the investment bank is to determine the value of a possible acquisition and to help the parties come to a fair price. The bank will also help with executing and structuring the acquisition so that they can ensure that the deal goes as well as possible.
Research is another important service that investment banks deal in. The research divisions of these institutions review companies and then write documents about their prospects. They will usually include “buy,” “sell,” and “hold” ratings.
Although the research won’t bring in revenue on its own, the information that they come up with is used to help traders and sales. Investment bankers also get publicity for their partners and clients.
The research is also going to act as investment guidance to outside customers. This will hopefully get the clients to take the advice and execute a trade via the trading desk of a bank, which will then lead to increased revenue for the bank.
The research division is what powers an investment bank’s ability to conduct quantitative analysis, credit research, macroeconomic research, and fixed income research. All of this will then be used both externally and internally at the bank.
Underwriting Deals
Investment banks will usually underwrite deals while they’re also arranging capital markets financing for their customers. This means that they manage the risk that comes with the process of purchasing the shares of stock from the issuers and selling them to institutional buyers or the public.
Investment banks purchase shares at one price and then add a markup to the sale price. This brings them a profit that makes up for the risk that they’re taking on. This is also known as the underwriting spread.
There will usually be a head investment banker who works with a group of investment bankers. This group is referred to as a syndicate and they all work together to underwrite an issue. This helps to spread the risk out among everyone.
An underwriter will sometimes just play the part of a go-between for marketing deals. They help to market the stock but don’t take on the risk that comes with underwriting. When this happens, the investment bankers will be able to sell shares and get paid on the basis of commission.
The Importance of Knowing About Investment Banks
Hopefully, after reading the above article, you now have an answer to the question, “what do investment banks do?” As we can see, investment banks tend to work with large institutions and perform complex deals that can involve enormous amounts of money.
And even though many people might not directly interact with an investment bank, the actions that these banks take can affect a variety of people, especially those who invest. And by knowing how these banks operate, you’ll be better to make more informed and confident financial and investing decisions.
Are you wondering if now’s a good time to invest? If so, then make sure to check out our other articles for more!
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