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Investment Banking

Investment Banking

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Published by: prgupta92 on Dec 23, 2009
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09/29/2010

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Investment Banking

For layman
• Commercial banks and investment banks performed completely distinct functions. If you need a loan to buy a car or house, You will visit a commercial bank and When you need to raise cash to fund an acquisition or build your factory you will call on your investment bank.

Definition
• “An investment bank is a financial institution that
– – – raises capital, trades in securities and manages corporate mergers and acquisitions.

It is an umbrella term for a range of activities:
– – underwriting, selling, and trading securities (stocks and bonds); providing financial advisory services, such as mergers and acquisition advice; and – managing assets.

Investment banks offer these services to companies, governments, non-profit institutions, and individuals”.  

 

An Overview
• “Corporate raise capital by issuing securities in the market. Investment bankers act as intermediaries between the issuers of capital and the ultimate investors who purchase the securities”

• “Investment banking can be broadly defined as financial intermediation that matches the entities that need capital and those that have capital.”

Investment banking process
Securities

Issuer

Investment Banker

Investor

Cash

Financial Markets Structure

Terminologies
• Money Market
– the money market is the global financial market for short-term borrowing and lending. It provides short-term liquidity funding for the global financial system.

• Call Money Market

– This is the market for very short term funds, known as money on call. The rate at which funds are borrowed in this market is called `Call Money rate‘

• Capital Market

– A capital market is a market for securities (both debt and equity), where business enterprises (companies) and governments can raise long-term funds

• The primary market
– is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus.

o The secondary market,
 also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold

• Private placements:
– A private placement (or non-public offering) is a funding round of securities which are sold without a initial public offering, usually to a small number of chosen private investors.

• Over the counter transaction:
(OTC) trading is to trade – Over-the-counter financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is contrasted with exchange trading, which occurs via facilities constructed for the purpose of trading (i.e., exchanges), such as futures exchanges or stock exchanges.

• Rights Issue:
– Under a secondary market offering or seasoned equity offering of shares to raise money, a company can opt for a rights issue to raise capital. The rights issue is a special form of shelf offering or shelf registration. With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time.[1] A rights issue is in contrast to an initial public offering (primary market offering), where shares are issued to the general public through market exchanges.

Functional Areas of Investment Banking
• Capital Markets – – Sales, Trading & Research (Equity and Fixed Income) – Distributes new (primary) security issues to institutional investors/clients – Transacts blocks of previously issued (secondary) securities through private placement or negotiation – Maintains markets for securities already distributed – Provides research on securities, companies, industries and economies Investment Management Services – Provides investment and financial advisory services – Focuses on high net worth individuals and mid-sized institutional investors Investment Banking – Provides strategic, financial and valuation advisory services – Raises capital through the issuance of securities – Advises companies in merger & acquisition and restructuring transactions – Offers specialized products and services to meet the needs of corporate and government client

Roles of Investment Bankers
• Management of debt and equity offerings:
– – – – – – – Instrument designing Pricing the issue Registration of the offer document Underwriting support Marketing of the issue Allotment and refund & Listing on stock exchanges

• Placement and distribution:
– The distribution network of an investment banker can be classified as institutional and retail

• Corporate Advisory Services:
– Customize solution to the financial problems of the clients which include financial structuring, rehabilitation and turn around management

• Project Advisory:
– They assist the companies in conceptualizing the project idea. Once the idea is conceptualized they carry out the initial feasibility studies to examine it viability.

• Loan syndication:
– Investment bankers arrange to tie-ups loans for their clients

• Venture capital:
– Identifying the venture funds whose investment policies matches with the requirement of the company

• Mergers and acquisitions
– Setting up deals where one company buys another is an important source of fee income for many investment banks

• Divestitures
– Involves sale of assets (tangible & Intangible) or business entities.

• Financial Engineering
– It involves designing development and implementation of innovative financial instruments and process and the formulation of creative solution to the problems in finance

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