Investment Banking

Reviewed by Annapoorna | Updated on Aug 26, 2020

Introduction

Investment Banking is a financial service provided by a banking division or a finance company. It assists high-net-worth individuals, companies, or government to raise or create capital. They underwrite new securities for all types of corporations, assist in the sale of securities, and arrange for mergers and acquisitions or reorganisations.

An investment banker is an expert who understands and advises corporations about the feasibility of large projects. He helps in identifying the risks associated with the projects before his client can invest time and money.

Understanding Investment Banking

An investment bank acts as an intermediary between the company and the investors on the stock exchanges. It creates a viable investment plan for businesses that involves proper pricing of financial instruments. When the company holds an initial public offer (IPO), an investment bank will buy most of the shares directly.

Subsequently, it sells these shares on the market, acting as a proxy to the company. Thereby, it aids to maximise the company’s revenue and ensures that all applicable regulatory policies are followed. In turn, it gains by marking up on the initial price of shares while selling it to investors. On the other hand, if the stock becomes overvalued, it may also lose money as it ultimately sells at a lesser price than it paid.

A company should carefully consider its need to approach an investment banker to grow its business. The size of capital being raised and the market competition are the primary factors to consider before turning to the aid of an investment banker. Further, new ventures must be thoroughly researched before proceeding and hence, the investment banker has the necessary expertise in this.

Accordingly, the following are the benefits of taking the help of an investment bank:

  1. Effective client handling and handholding about investing their money in other companies to increase their value.

  2. An assured raising of financial capital by underwriting or by acting as an agent in the issuance of securities to arrange for acquisition, merger or sale.

  3. Thorough investigation and due diligence to ensure that its client’s deal meets every compliance to minimise any failure risk or loss of invested capital.