INVESTMENT BANKS

INVESTMENT BANKS

An investment bank is a larger and bigger financial institution that works primarily in high finance. The organisation helps companies access capital markets such as bond and stock markets. This helps raise funds for expansion and other needs. In this article, we are going to talk about what investment banks are, how they work and what is their role in the financial markets. 

WHAT IS AN INVESTMENT BANK?

An investment bank is a special kind of financial institution which aims to help companies access capital markets to raise money and take good care of other business needs. A typical investment bank can raise equity and debt capital, insure launching new products and bonds, engage in proprietary trading, also the inhouse money managers team can trade or invest the companies own money for its private account. 

For example, Lets say ABC company wants to sell Rs 100 Crore worth of bonds to build infra in Asia. An investment bank will help it to find buyers and handle the paperwork leg with a team of accountants and lawyers. Investment banks can also be actively involved in IPOs. This is when a private market goes public and lists into one of the stock exchanges. 

WORKING OF INVESTMENT BANKS 

Investment banks are often divided into 2 camps, the buy and sell sides. But many offer both types of services. The sell side often signifies to selling shares of fresh issue IPOs placing new bond issues, engaging in market making or helping in facilitating transactions. 

But in contrast, the buy side works with mutual funds, pension funds, hedge funds and the investing public. The vision is to help them maximize their returns when investing or trading in securities such as bonds and stocks.

Many banks are divided into three categories or divisions as they are based on the services provided and the employees’ responsibilities i.e., Front office, Middle office and Back office.

The Front office services comprises of:

• Corporate financing (such as issuing crores of rupees in Commercial Paper to help fund day to day operations)
• Strategy formulation
• Merchant banking 
• Capital market and investment research reports prepared by professional experts and analysts. 
• Helping organisations and entities in mergers and acquisitions. 
• Professional investment management for HNIs or institutions. 

The Middle office services comprises of:

• Compliance with government restriction and regulations for professional clients such as insurance companies, banks and finance divisions as well as capital flows. 
• These are people who witness the funds coming in and out of the firm and this helps to determine the liquid amount the company needs to keep in hand so that it does not get into financial trouble. 
• The team of capital flows can use this information to restrict trades by reducing the trading and buying power available for other divisions. 

The Back office services comprises of:

• Making sure the technology and software platform that allow traders to do their jobs are functional and state of the art.
• Creating new and innovative trading algorithms.
• Ensuring that the correct securities are sold, brought and settled for the right amounts. 

COMMERCIAL BANKS VS INVESTMENT BANKS

There is one major difference between the two. Investment banks focus on helping businesses access capital markets. Commercial banks primarily deal with loans and deposit accounts for companies and individuals. Here is a quick summary of differences: