What Is the Role of an Investment Bank?
Investment banks serve several purposes in the financial and investment world, including underwriting new stock issues, handling mergers and acquisitions, and acting as a financial advisor.
Other roles of investment banks include asset management for large investment funds and personal wealth management for high-net-worth individuals. Some of the major investment banks include Goldman Sachs, JPMorgan Chase, and Credit Suisse.
Key Takeaways:
- Roles of investment banks include the underwriting of new stock issues, handling mergers and acquisitions, and acting as a financial advisor.
- Major investment banks include Goldman Sachs, JPMorgan Chase, and Credit Suisse.
- Investment banks help corporations obtain debt financing by finding investors for corporate bonds.
- Investment banks guide corporations when going public, raising capital, and through mergers and acquisitions.
How Investment Banks Work
As their core function, investment banks help corporations obtain debt financing by finding investors for corporate bonds. The investment bank's role begins with pre-underwriting counseling and continues after securities distribution in the form of advice. The investment bank will also examine the company’s financial statements for accuracy and publish a prospectus that explains the offering to investors before the securities are made available for purchase.
Investment banks’ clients include corporations, pension funds, other financial institutions, governments, and hedge funds. The best investment banks are usually the largest. The more connections the bank has within the market, the more likely it is to profit. The largest investment banks have clients around the globe.
Underwriting New Stock Issues
One of the primary roles of an investment bank is to serve as a sort of intermediary between corporations and investors through initial public offerings (IPOs). Investment banks provide underwriting services for new stock issues when a company decides to go public and seeks equity funding. Underwriting basically involves the investment bank purchasing an agreed-upon number of shares of the new stock, which it then resells through a stock exchange.
Part of what an investment bank is paid to do is to evaluate a company and determine a reasonable price at which to offer stock shares. IPOs, especially for larger companies, commonly involve more than one investment bank. This way, the risk of underwriting is spread across several banks, reducing the exposure of any single bank and requiring a relatively lower financial commitment to the IPO. Investment banks also act as underwriters for corporate bond issues.
Financial Advisory Roles
Investment bankers act in several different advisory capacities for their clients. In addition to handling IPOs, investment banks offer corporations advice on taking the company public or raising capital through alternative means. Investment banks regularly advise their clients on all aspects of financing.
Mergers and Acquisitions
Handling mergers and acquisitions is a major function of investment bankers. As with IPOs, one of the main areas of expertise for an investment bank is its ability to evaluate the worth of a possible acquisition and arrive at a fair price. An investment bank can also help structure and facilitating the acquisition to make the deal go as smoothly as possible.
