Investment banking is a segment of banking operation which plays an important role in raising the capital of an individual business or for an organization. They help new firms to go public. They also play a role as intermediaries between the investors and security issuers. The main purpose of investment banking is to create capital for companies, governments, and other entities.
They raise capital by selling securities and by underwriting the issuance of new equity shares. These operations are much different from commercial banking, where they focus on deposits and commercial loans.
An Investment bank offers various financial services for their clients. These include trading of derivatives, foreign exchange, fixed income, commodity, etc. They also perform advisory services for mergers and acquisitions. Initial Public offerings are also performed by Investment banks and they trade on securities and issue or sell bonds on behalf of the client. They also perform leveraged finance which involves lending money to firms for the purpose of purchasing assets and settlement of acquisitions. Restructuring is also a part of investment banking which includes improving the structures of the companies to improve efficiency and enable it to maximize profit.
Investment bankers, in addition to handling IPOs, act in various advisory capacities for their clients. They offer advice to corporations on whether they can take the company public or should raise their capital through alternative means. They regularly advise their clients on all aspects of corporate financing.
So, Investment banking has a major role in assisting corporate and government agencies to obtain capital financing. As financial advisors, they help their clients to price capital, and to thoughtfully allocate their resources and also to manage their investments.
Investment banking is truly the most complex financial mechanisms in the world. They serve a variety of purposes for the business entities they deal with.
The following scenario explains how does an investment bank is able to earn money through acquisition advisories that they provide.
Let’s assume a company plans to buy another company. But this company is unsure about the net worth of the company which it wants to buy. Hence they are unable to make correct judgments about the long-term benefits this venture will bring in to them, with respect to revenue, costs, etc.
The role of the Investment banking, in this case, will be to determine the company’s value through due diligence and settle the deal by helping the company that wants to buy with the preparation of necessary documents and also ensuring the deal is done on the appropriate time for maximum benefits. Here, the Investment bank becomes responsible for the business valuations, as the deal will be based on the result of the business valuation done.
In this case, the Investment bank works on the buy side. There could also be some other investment banks that could have been working on the sell side. Thus, the earnings of the concerned investment banks shall depend on the total net worth of the deal made.
This is just one of the examples of the various services provided by Investment banking. They maintain the balance between organizations and make seemingly difficult decisions made possible.
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