Investment Banks - Shaping the economy
A bank dealing in securities and offering financial services like trading of securities, the raising of capital, or managing mergers and acquisitions is an investment bank. Unlike commercial banks, they assist public as well as private corporations in debt and equity fundraising in Capital Markets, and provide advisory services for all kinds of financial transactions
The original purpose of these institutions was raising capital and advising clients about mergers, acquisitions and all corporate financial strategies. With time, as banks took on more activities, investment banks came to play many more roles like underwriting and distributing security issues, brokerage services for investors, financial advice on security issues, advising on corporate deals, conducting financial research and so on. They also diversified into services like currency exchange and private banking, as well as bridge financing.
One of the major roles is advising companies about raising funds, which they do in two main ways. They raise funds via capital markets or through private placements. The raising of funds in capital markets can be accomplished either by selling company equity in stock markets as an IPO, or initial public offering, or as a secondary offering. Or, they can provide advice on debt issues. In addition, investment bankers advise clients on private placements, the purchase or sale of securities. There are many types of private placement transactions, including venture capital investments, investments by the companies, private equity investments, acquisitions, private debt placements, divestitures, as well as merchant banking.
Investment banks create a network of financial contacts, have knowledge of the current market, and of various legal processes, and of comparable market events, thus allowing clients to gain a competitive edge. Some major public and private investment banks globally are ABN Amro, Barclays Capital, Banc of America Securities, Bear Stearns, Brown Brothers Harriman, Calyon, and BNP Paribas.
Investment banks also aid companies, governments and government agencies in raising funds via issue and sale of securities in primary markets, and assist public and private corporations to raise money in capital markets. They provide advisory services for strategizing financial transactions like mergers or acquisitions. They act as go-betweens in trading. In recent years, more and more commercial banks have begun to offer investment banking services. The Glass-Steagall Act, created after the US Stock Market Crash of 1929, prohibited banks accepting deposits or underwriting securities. The act was later repealed in 1999. Investment banks can differ from brokerages, which assist in the purchase and sale of securities like stocks, bonds, and mutual funds, although some do perform both kinds of functions.
Almost all the investment banks today are involved in additional financial services, like trading of fixed income, currency exchange, commodities, and equity securities. So any person involved in either of these sides of business can be called an investment banker. The traditionally termed investment banking services are now called the sell side, and other financial services are called the buy side. Most firms now have both a sell as well as a buy side to their operations.
In general, the sell side is basically engaged in persuading the people on the buy side. Hence, it is considered more desirable to be on the buy side, with its accompanying discretionary control over the decision making process. However, it does not follow that the buy side is necessarily more personally lucrative. Like most businesses, financial rewards are dependent on identifying opportunities.