B Com Exam > B Com Notes > Financial Markets and Institutions > Introduction to Investment Banking - Financial Markets and Institutions
Introduction to Investment Banking - Financial Markets and Institutions | Financial Markets and Institutions - B Com PDF Download
Definition: Investment banking is a special segment of banking operation that helps individuals or organisations raise capital and provide financial consultancy services to them.
They act as intermediaries between security issuers and investors and help new firms to go public. They either buy all the available shares at a price estimated by their experts and resell them to public or sell shares on behalf of the issuer and take commission on each share.
Description: Investment banking is among the most complex financial mechanisms in the world. They serve many different purposes and business entities. They provide various types of financial services, such as proprietary trading or trading securities for their own accounts, mergers and acquisitions advisory which involves helping organisations in M&As,; leveraged finance that involves lending money to firms to purchase assets and settle acquisitions, restructuring that involves improving structures of companies to make a business more efficient and help it make maximum profit, and new issues or IPOs, where these banks help new firms go public.
Let's understand how an investment bank earns money by providing acquisition advisories.
Think of company ABC buying another company XYZ. ABC is not sure how much company XYZ is really worth and what will be the long-term benefits in terms of revenues, costs, etc. In this scenario, the investment bank will go through the process of due diligence to determine the value of the company, settle the deal by helping ABC prepare necessary documents and advising it on the appropriate timing of the deal.
Here the investment bank works on the buy side and some other investment banks may be working on the sell side to help XYZ. The bigger the deal size, the more commission the bank will earn.
Bank of America, Barclays Capital, Citigroup Investment Banking, Deutsche Bank, and JP Morgan are some of the largest investment banks in India.
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FAQs on Introduction to Investment Banking - Financial Markets and Institutions - Financial Markets and Institutions - B Com
| 1. What is investment banking? |  |
Ans. Investment banking refers to the financial service sector that helps companies and governments raise capital by underwriting or acting as an intermediary in the issuance of securities. It involves activities such as mergers and acquisitions, corporate finance, trading, and asset management.
| 2. How do investment banks facilitate capital raising? | |
Ans. Investment banks facilitate capital raising by helping companies issue debt or equity securities. They assist in the initial public offering (IPO) process, where a company's shares are offered to the public for the first time, allowing the company to raise funds. Investment banks also help in private placements, where securities are sold to a select group of investors.
| 3. What is the role of investment banks in mergers and acquisitions (M&A)? | |
Ans. Investment banks play a crucial role in mergers and acquisitions by advising companies on potential acquisitions, conducting due diligence, structuring deals, and negotiating terms. They also provide valuation analysis and help in securing financing for the transaction. Investment banks act as intermediaries, connecting buyers and sellers in the M&A process.
| 4. How do investment banks engage in trading activities? | |
Ans. Investment banks engage in trading activities by buying and selling various financial instruments such as stocks, bonds, commodities, and derivatives. They trade on behalf of their clients or for their own accounts. Investment banks have trading desks that specialize in different asset classes and use sophisticated trading strategies to generate profits.
| 5. What are the risks associated with investment banking activities? | |
Ans. Investment banking activities involve various risks, including market risk, credit risk, operational risk, and liquidity risk. Market risk arises from fluctuations in market prices, which can result in financial losses. Credit risk is the risk of default by counterparties or borrowers. Operational risk refers to the potential for errors, system failures, or fraud. Liquidity risk is the risk of being unable to sell a security at a desired price due to limited market liquidity. Investment banks have risk management systems in place to mitigate these risks.
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