What is Investment Banking?
Investment banking is a specialized banking area that helps raise funds and offers advice to individuals or organizations.
History of Investment Banking?
Some of the earliest investment banking companies are Barclays (1690), JP Morgan (1799), Citi bank (1822), Credit Suisse (1856), Goldman Sachs (1864), Merrill Lynch (1914), Morgan Stanley (1935).
In early period, Investment bank’s primary work is Underwriting. but as time passes investment banking started to provide more services.
Origination of Investment Banking?
There were some limitations in traditional banking due to which investment banking prominent companies were originated, that are:
- Incapability of the normal banks
- Government could not raise funds for big projects.
- Did not know pricing.
- No market understanding.
- Interest of the investors were not satisfied.
Investment banks acted like prominent middlemen.
What Investment Banking does?
Investment banking offer services like Underwriting, Advisory Services, Trading & Broking Services, Asset Management.
- Underwriting- In this service groups work between investors & organisations to helps in raising the funds or go to public through ipo. These services are done in primary market.
- Advisory Services- In this category, services are offered like Merger & Acquisition.
- Trading & Brokerage Services- It is heart of modern Investment banking.Trading takes place with all sorts of securities – Bonds, Equity & Derivatives.
- Asset Management- In this type of service banking manages different types of investment of investors including institutional & individual across globe.
Underwriting Services
Underwriting is the process in which banker give the guarantee to sale of a securities or bond to investors E.g., Initial Public Offering at the behest of organisations. Businesses want money to grow their business and Underwriters gave the assurance of unsold securities to purchase.
There are two types of underwriters:
- Firm Commitment: Under the firm commitment, the underwrite agrees to buy the entire securities of any unsold securities & grasp full responsibility.
- Best efforts: Underwriter guarantee of selling securities as much as possible but did not commit to purchase of any shares if unsold and return back to the issuing Company.
Advisory Services
There are two types of advisory services provided by IB
- Mergers
- Acquisitions
The title ‘mergers’ & acquisitions’ are often used interchangeably, but they are different.
Mergers:
Under mergers, the BOD for two companies amalgamates between them and form a new entity. E.g.,PVR and Inox Leisure merged and renamed as PVR INOX Ltd., Zee and Sony merged and renamed as Culver Max Entertainment, Vodafone and Idea merged and rebranded as V!
Acquisition:
Under this, the acquiring company obtain the majority shares of a target company and its operations. E.g., Google acquired Android in 2005, Tata acquired BigBasket in 2021, Zomato acquired Uber Eats in 2021, Walmart acquired Flipkart in 2018.
Trading & Brokerage Services
Investment Banking also provides trading & brokerage services. IB provides trading across various securities like- Bonds, Equity & Derivatives. It is the heart of modern investment banking services. Earlier I-banking works only in underwriting.
In Trading I-banking provides services like-
- Equity trading.
- Fixed income trading.
- Derivatives trading.
- Algorithmic trading.
- Market-making.
- High frequency trading.
In Brokerage I-banking provides services like-
- Order execution.
- Portfolio management.
- Research & Analysis.
- Custodial service.
- Market access.
- Regulatory compliance.
Investment Banking also deals in activities like Proprietary trading & Client-Based trading.
Proprietary Trading: In Proprietary trading banks using their own capital for trading in securities for their profit.
Client-Based Trading: In client-based trading banks function as a Middlemen, executing trades on their client’s behalf.
Asset Management Services
Investment banking manages a wide range of clients, including organisations & individuals, through a variety of investment strategies. These services aim to optimize returns while managing risk based on client objectives.
Investment Banking Clients
- Government: I-Banking works with government and help them to raise fund or trade securities and buy or sell corporations.
- Corporation: I-Banking works with public & private companies & help them go Public (IPO), raise additional fund, grow their business, make acquisition, and provide corporate finance advice.
- Institutions: I-Banking facilitates trading and research services accessible to institutional investors who manage other people’s money.
Investment Banking Skills
- Financial Modelling
- 3-Statement models
- Discounted Cash Flow (DCF)
- Leveraged Buyout (LBO)
- Business Valuation
- Negotiation
- Sales & business development
Main Investment Banks
- Bank of America Merrill Lynch
- Barclays
- Citi Bank
- Morgan Stanley
- Goldman Sachs
- UBS
- Deutsche Bank
- Credit Suisse
- JP Morgan Chase
- HSBC
Conclusion
Investment banking is a significant part of the global financial system because it assists business corporations to raise funds, expand, and to develop the economy. It has been able to grow over the years into the various markets throughout the world because of its dynamic nature.
FAQ’s
1. what is investment banking, in simple terms?
Investment banking is a kind of banking that assists corporations, governments, and institutions to raise funds as well as undertaking critical financial judgments, including mergers and expansions.
2. Services of investment banks What are the services of investment banks?
The basic services are underwriting, advisory services (mergers and acquisitions), trading and brokerage, and asset management.
3. What is underwriting in investment Banking?
When an investment bank assists a company to raise funds by issuing securities, and also warrant their sale to investors, it is referred to as underwriting.
4. what is the distinction between a merger and an acquisition?
A merger refers to a combination of two companies to create another one as compared to an acquisition which involves acquiring one company by the other.
5. Who are the investment bank clients?
The investment banks deal with governments, corporations, as well as institutional investors to assist them in raising capital, investing, and expanding.
6. What is the investment banking skill requirement?
Financial modelling, valuation, analytical, communication and negotiation are key skills.
7. What is the significance of investment banking?
Investment banking is an important part of the economic growth as it assists companies in raising their funds, developing their operations, and connecting them to investors.
8. What are the roles of investment banks in IPOs?
The investment banks assist companies to go public by pricing the shares, the issuance process and selling the shares to the investor.
9. What is proprietary trading?
Proprietary trading refers to the process in which the investment banks trade in securities using their own fixed capital and make profits.
10. Is investment banking a good profession?
It presents good learning prospects, excellent growth prospects and openness to huge financial transactions, yet it may be challenging.
