We hear the term "investment bank" on a daily
basis. These banks are vilified for their role in the financial crisis and
criticized for the profits they reap and the large compensation packages for
their employees. But many people have no idea what they are or what they do.
Let's take a look at the role i-banks play in the financial services industry
and the economy at large.
Our Investment banking in Oklahoma is a individual organization that helps
individuals or other organizations financial consultancy services.
Investment
banking company in Oklahoma work as
intermediaries between investors and security issuers and help new firms to go
public. According to United States security law, we help companies in three
kind of investment. Open end management investment (Mutual funds), close end
management investment (closed-end funds) and unit investment trust (UTI’s)
So what is an investment bank? First of all, they are very
different than the commercial banks we are all familiar with. They do not take
deposits like the retail bank on the corner. Instead, they primarily assist in
the buying, selling and issuing of securities - that is stocks, bonds and
similar financial instruments.
They assist companies and institutions on "buy
side" and "sell side" activities. The buy side refers to the
advising of institutions concerned with buying assets and securities. Entities
that engage in buy side activities include private equity funds, mutual funds,
hedge funds, pension funds and proprietary trading desks. The sell side refers
to a broad range of activities, including broking and dealing securities,
investment banking, advisory functions and investment research.
The core functions of an i-bank include investment banking -
otherwise known as corporate finance - sales and trading and research. Some
larger investment banks also perform other services like investment management
or merchant banking, but let's take a closer look at the core three.
1. Investment Banking
(Corporate Finance)
Investment banking can be a confusing term because many
people use it to refer to any activities performed by an i-bank. More
specifically, though, investment banking refers to assisting companies with
raising capital and giving advice on mergers and acquisitions.
The corporate finance department of a bank is the group that
works with a company to put together an initial public offering (IPO). Or, if a
company already has public stock outstanding, they might put together a
follow-on offering, which is simply an additional issuance of stock shares. The
corporate finance department can also help companies raise capital through
private placements, which often involve securing capital from private equity
groups.
Should the ownership of a company seek to sell the entire
enterprise, the corporate finance department can also advise on M&A
transactions. They can help identify potential buyers and negotiate a sale of
the entire company. Likewise, if a company is in the market for acquiring other
enterprises, this group can advise on acquisitions.
Another service that the corporate finance department might
offer is the delivery of fairness opinions. In a fairness opinion, an
investment bank will perform an analysis of a potential acquisition and render
an opinion as to whether a reasonable price is being offered for the target
company.
2. Sales and Trading
Sales and trading is perhaps the primary service that an
i-bank can offer. There are often two major divisions within sales and trading
- institutional and retail. The institutional division buys and sells financial
products for institutional clients such as mutual funds, pension funds, etc.
The retail division buys and sells financial products for retail investors.
Stock brokers fall into this area.
The sales and trading department engages in market making.
Market making involves buying and selling financial instruments in order to
make an incremental profit on each trade.
Sales and trading can also engage in proprietary trading.
Proprietary trading involves a special group of traders who do not work with
clients. These traders take on "principal risk", which involves
buying or selling a product and does not hedge his total exposure. By managing
the amount of risk on its balance sheet, an investment bank can maximize its
profitability.
The sales and trading department also interacts with the
corporate finance department on the issuance of IPOs and follow-on offerings.
It is the sales and trading department that builds a book for a particular
stock by calling up institutional and retail investors to judge the interest
for the offering. They then price the initial sales value on the day of the
offering and begin selling the new shares to their clients.
Depending on the size of an offering or the desired mix of
investors for the offering, several investment banks may be involved in issuing
shares to the public. This group of banks constitute the syndicate and are
responsible for selling the shares involved in the offering.
3. Research
The research department is staffed by research analysts.
These are the people who often appear on business news programs and talk about
the performance of a particular company or stock. The role of the research
department is to analyze companies and writes research reports that discuss
their performance potential. These reports often include a "buy" or
"sell" recommendation.
The research department on its own does not generate a lot of
income. What it does do is influence trading volume, which results in more fees
for sales and trading. When a research analyst changes his or her
recommendation on a stock, many investors will then act on that recommendation
and the sales and trading team earns more in trading fees.
There exists, however, a conflict of interest between
research and other parts on the investment bank. If an investment bank were
about to issue new shares of stock for a company, for example, the research
analyst could put out a strong recommendation for the stock just prior to the
offering, and the bank could get a better price and potential earn more fees.
Likewise, if the proprietary trading division wanted to boost
the return on their holdings, they could have research analysts recommend some
of the stock they held as a buy. There are a number of areas where the research
department could be used to mislead investors and earn more profit for the
investment bank.
To circumvent these conflicts of interests, regulators have
insisted that investment banks implement a "Chinese wall" in their
firms. The Chinese wall keeps information about the investment bank's corporate
finance and sales and trading activities from passing through to the research
department.
A Chinese wall also exists between the corporate finance and
sales and trading divisions because many corporate finance activities involve
non-public information that could be used to profitably execute trading
strategies.
# A World without
I-Banks
Without investment banks, companies would have a much more
difficult time with raising capital. Likewise, the general public would have a
hard time investing their money in anything other than a savings deposit and Management
Consulting in Oklahoma.
Without i-banks, only very large institutions or very wealthy
individuals would be able to structure the same financial transactions that occur
every day with an i-bank.
In short, these banks drastically speed up the flow of
capital throughout the economy and allow businesses - and our savings - to grow
more quickly. As complicated as all these activities may seem, they only
scratch the surface of all the intricacies of these banks.
But the next time you hear that some investment bank advised
on the sale of a company or generated several billing dollars in trading fees,
at least you'll have an idea of what they're talking about
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