Investment Banking is a popular term in the business arena. It is also considered to have great scope as a career. So what is it? It is one of the most essential prerequisites before one begins a business or a startup or anything else too. It is a necessity. Investment Banks help companies obtain and raise money and also provide advisory help. They help raise capital by underwriting securities to governments and corporations. They help companies that work around mergers, acquisitions and also help in trading derivatives, commodities, fixed income requirements and equity securities.
Investment Banking had been in its prime from 1896 to 1929 until the great depression began, thanks to the Federal Reserve Loans which had created extreme speculation of the market. Throughout the former period, J.P. Morgan and National City Bank were said to always come to the rescue when there was any crisis in the financial system. The Great Depression had the banking system in a mess with 40% according to statistics, of banks being forced to merge or just sinking. Rehabilitation measures were however taken, like the separation between investment banking services and brokerage services to prevent any conflict of interests if they did try to do both and the Bank Act of 1933 (Glass-Steagall Act) was established which mainly got the distinction between commercial banking and investment banking. Regulations like Chinese Wall was also made during this period. The 1970-1980 decade saw integrated investment banks flourish which had sales, trading, investment banking and research at one stop. Corporate mergers became the trend in the late 1970s. The 80�s produced popular products like high yield, structured products and derivatives which gave lucrative to the ones who provided them, the investment banks.
Investment banking became a more appealing career known for its flair and power in the 1980s with mega-deals everywhere. It also became a topic in popular media (eg. Oliver Stone in �Wall Street� and Tom Wolfe in �Bonfire of the Vanities�). Through the 1990s, we saw the IPO dominate the world of investment banking and by early 2000s at least 548 IPO deals had been made and done, says statistics. Gramm-Leach-Bliley Act (GLBA) of November 1999 allowed security banking (insurance) along with investment banking, thus permitting �broad banking�. GLBA was the turning point since a long time had been since the belief against the mixing of financial activities and other banking.
There is the Investment Banking Division (IBD) of a bank and a full time service Investment Bank. The former provides only M&A advisory services and underwriting. Investment banks (also called corporate finance) raises capital for clients and also provides advisory help on LBO�s, M&A and several others.
In the Sales and Trading sector, the larger banks provide a little more help to their clients where they will buy and sell items or securities on their behalf and also of the bank�s.
In the Research sector, the ratings of buying and selling of items and securities are reviewed, companies are reviewed and reports are written on the data and analysis. They make reports that will help investors make decisions and also trade stocks. M&A are Mergers and Acquisitions in which Investment Banks provide advisory aid to both the buyers and sellers from the start of the business to the end. Asset Management is also a service that they provide where they manage investments for a great number of investors which even include individuals and investments of various kinds.
Underwriting services go hand in hand with capital raising and this works between investors and companies which raise money, or even go public through the IPO process. This gets the primary market or new capital. Now we know that the IBD of Banks provide only M&A and Underwriting. In Merger and Acquisitions, the banks find opportunities and negotiate for their clients on their behalf by employing their extensive networks .They advice both the buyers and sellers of these transactions.
Best Efforts �Here, the underwriter agrees to see as much issue at the offered price fixed together on agreement but can also return unsold shares to the one who issued, albeit any financial responsibility.
Firm Commitment- The underwriter has to buy the entire issue and also should be responsible for all sold and unsold shares.
All-Or-None- The underwriter can decline the deal if the entire issue is not sold at the offered price. This is like a binary concept. Either the company receives everything or it receives nothing.
Governments- Money raising, security trading and buying/selling of crown corporations.
Institutions- These manage others� money and investment banks provide these institutions with security trading and research.
Corporations- These include public and private companies. Investment banks help these go public (meaning, IPO), in their business growth, additional capital raising, acquisition making (M&A), research, selling of business units and also advisory help on general corporate finance.
Investment Banking demands specific skills from their bankers for them to qualify to provide advisory help, underwriting services, analysis, research and M&A which are as follows-
Investment Banking is quite the necessity in everyday life and in business. Quite the tricky business with ups and downs forthcoming and sometimes even unpredictably. But if, handled carefully and strategically, you can reap your fruits. If you are looking to make investments, make sure to do your research first and consult the most suitable and best Investment Bank or banker to get your work on the best track. If you are an Investment banker yourself, just recall these lines from Tom Wolfe�s book.
″ Look the Part ″
″Greed might photograph well, but that doesn�t make it good. ″
″Every battle is won before it is ever fought. ″
After going through this article we will be able to:
Though investment skills are gained over time with experience but gaining knowledge consistently is involved in the process that leads one to expertise.