02-07-2012, 04:18 PM
Seminar on Investment Banking
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INTRODUCTION
At a very macro level, ‘Investment Banking’ as term suggests, is concerned withthe primary function of assisting the capital market in its function of capital intermediation, i.e., the movement of financial resources from those who havethem (the Investors), to those who need to make use of them for generating GDP(the Issuers). Banking and financial institution on the one hand and the capitalmarket on the other are the two broad platforms of institutional that investment for capital flows in economy. Therefore, it could be inferred that investment banks arethose institutions that are counterparts of banks in the capital markets in thefunction of intermediation in the resource allocation. Nevertheless, it would beunfair to conclude so, as that would confine investment banking to very narrowsphere of its activities in the modern world of high finance.
investment banking is what investment banks do’
. This definition can beexplained in the context of how investment banks have evolved in their functionality and how history and regulatory intervention have shaped such anevolution. Much of investment banking in its present form, thus owes its origins tothe financial markets in USA, due o which, American investment banks have bankshave been leaders in the American and Euro markets as well. Therefore, the term‘investment banking’ can arguably be said to be of American origin. Their counterparts in UK were termed as ‘merchants banks’ since they had confinedthemselves to capital market intermediation until the US investments banks enteredthe UK and European markets and extended the scope of such businesses.
Investment banks
help companies and governments and their agencies to raisemoney by issuing and sellingsecuritiesin the primary market. They assist publicand privatecorporationsin raising funds in thecapital markets(bothequityanddebt), as well as in providing strategic advisory services for mergers,acquisitions and other types of financial transactions.Investment banks also act as intermediaries in trading for clients. Investment banksdiffer fromcommercial banks, which take deposits and make commercial and retailloans.
Recent evolution of the business
New products
Investment banking is one of the most global industries and is hence continuouslychallenged to respond to new developments and innovation in the global financialmarkets. Throughout the history of investment banking, many have theorized thatall investment banking products and services would becommoditized. New products with higher margins are constantly invented and manufactured by bankersin hopes of winning over clients and developing trading know-how in newmarkets. However, since these can usually not be patentedor copyrighted, they arevery often copied quickly by competing banks, pushing down trading margins.
Investment banks provide four primary types of services:
Raising capital, advising in mergers and acquisitions, executing securities sales andtrading, and performing general advisory services. Most of the major Wall Streetfirms are active in each of these categories. Smaller investment banks mayspecialize in two or three of these categories.
Raising Capital
An investment bank can assist a firm in raising funds to achieve a variety of objectives, such as to acquire another company, reduce its debt load, expandexisting operations, or for specific project financing. Capital can include somecombination of debt, common equity, preferred equity, and hybrid securities suchas convertible debt or debt with warrants. Although many people associate raisingcapital with public stock offerings, a great deal of capital is actually raised through private placements with institutions, specialized investment funds, and privateindividuals. The investment bank will work with the client to structure thetransaction to meet specific objectives while being attractive to investors.
Mergers and Acquisitions
Investment banks often represent firms in mergers, acquisitions, and divestitures.Example projects include the acquisition of a specific firm, the sale of a companyor a subsidiary of the company, and assistance in identifying, structuring, andexecuting a merger or joint venture. In each case, the investment bank should provide a thorough analysis of the entity bought or sold, as well as a valuationrange and recommended structure.
Sales and Trading
These services are primarily relevant only to publicly traded firms, or firms, which plan to go public in the near future. Specific functions include making a market ina stock, placing new offerings, and publishing research reports.
General Advisory Services:
Advisory services include assignments such as strategic planning, businessvaluations, assisting in financial restructurings, and providing an opinion as to thefairness of a proposed transaction.
Terms Related To Investment Bank
Buying and Selling
Buying
Deciding on the proper time to purchase a security that you would like to add toyour holdings can be a daunting task. If the price drops immediately after you buy,it may seem as if you missed out on a better buying opportunity. If the price jumpsright before you make your move, you may feel as if you paid too much. As it turnsout, you should not let these small fluctuations influence your decision too much.As long as the fundamentals that led you to decide on the purchase have notchanged, a few points in either direction should not have a large impact on thelong-term value of your investment.Similarly, the fact that an investment has been increasing in value of late is not asufficient reason for you to purchase it. Momentum can be very fickle, and recentmovement is not necessarily an indicator of future movement. Therefore, buyingdecisions should be based on sound and thorough research geared towarddiscerning the future value of a security relative to its current price. This analysiswill probably not touch upon price movement in the very recent past. As you learnmore about investing you'll get better at deciding when to buy.
Selling:
There comes a time when investments must be liquidated and converted back intocash. In a perfect world, selling would only be necessary when investment goalshave been reached or time horizons have expired, but, in reality, decisions aboutselling can be much more difficult. For one thing, it can be just as hard to decidewhen to sell as it can be to decide when to buy. No one wishes to miss out on gains by selling too soon, but, at the same time, no one wishes to watch an investment peak in value and then begin to decline.Investors often seek to sell investments that have dropped in value in the short-term.