Investment banking is the field of banking that helps companies acquire funds. In addition to the acquisition of new funds, investment banking also offers advice for a wide range of transactions that companies may engage in.
Through investment banking, an institution generates funds in two separate ways. They may draw on public funds through the capital market by selling stock in their company, and they may also seek out venture capital or private equity in exchange for a stake in their company.
An investment banking firm also does a large amount of consulting. Investment bankers give companies advice on mergers and acquisitions, for example. They also track the market in order to give advice on when to make public offerings and how best to manage the business' public assets. Some of the consultative activities investment banking firms engage in overlap with those of a private brokerage, as they will often give buy-and-sell advice to the companies ...view middle of the document...
Therefore, default risk is not a concern for these institutions. They focus on assisting corporations in the issuance of securities, principally stocks and bonds. Since investment banks receive fees for their service at the issuance of these securities, the future successes or failures of these corporations is not a large concern of these banks. Indeed, the reputation of investment banks will be hindered when they assist companies that perform poorly, but the receipt of revenue not being tied to the performance after issuance makes these firms relatively risk tolerant.
Activities of a Typical Investment Bank:
* Raise equity capital (e.g., helping launch an IPO or creating a special class of preferred stock that can be placed with sophisticated investors such as insurance companies or banks)
* Raise debt capital (e.g., issuing bonds to help raise money for a factory expansion)
* Insure bonds or launching new products (e.g., such as credit default swaps)
* Engage in proprietary trading where teams of in-house money managers invests or trades the company's own money for its private account (e.g., the investment bank believes gold will rise so they speculate in gold futures, acquire call options on gold mining firms, or purchase gold bullion outright for storage in secure vaults).
Investment banks serve as intermediaries, that buy and sell securities( mainly stocks and bonds) to raise capital for clients. They also assist companies with M&A. they do not take federally backed securities which enables them to be less regulated than commercial banks. Because they are not under the myriad regulators investment banks offer products that have higher returns and high risk.
Commercial banks are more risk averse, because they make money in a different way. Commercial banks generate profits from the spread between what they pay their customers and what interest rate they get from loaning out depositor’s money. Banks are vested in the success of their customers because if the loans are not paid back, the bank looses money. Investment banks whereas receives upfront fees for their services. The future success or failure of a customer is a matter of less concern for investment banks.