Investment banking firms serve as an interface between businesses and investors. The phrase refers to the functions of a financial services firm or a corporate division that includes providing advice on financial transactions to individuals, corporations, and governments. Let's take a closer look at what these firms do.
Functions of an Investment banking firm
These functions can be broadly classified into three categories
1. Trading
Trading desks at these firms are often segregated by market. Foreign exchange, or forex, fixed income, equities, and commodities constitute the key segments. Each of these areas can be further subdivided. For instance, fixed income is a broad category that includes everything from treasury bonds to risky, low-grade company bonds, also known as junk bonds.
2. Mergers and Acquisitions (M&A)
Amongst the key functions of an investment bank are mergers and acquisitions. Typically, a larger corporation seeks to strengthen a specific aspect of its operations. Some large firms may decide that acquiring another business is a better approach to quickly joining a new market. Strategic buyers are big corporations that buy for this reason. During regular M&A agreements, investment banks are frequently invited in to advise on whether the deal makes sense or to assist in raising the necessary funds.
It is not always the case that the company being considered for buying wants to be acquired. These banks play a crucial role in hostile M&A negotiations as buying a company that doesn't want to be acquired sometimes needs more posturing and cash.
3. Research Reports
Analysts or strategists working for investment banks’ research divisions prepare these research reports. These reports often, though not always, have actionable recommendations for their clients. The reports generally cover a specific geographical region, industry sector, or asset classes, such as currency, commodity and fixed income.
These firms also perform a variety of related tasks such as underwriting deals: they act as underwriters for their clients' transactions and for arranging capital market financing. These firms profit from selling the shares at a markup for their clients. The underwriting spread is the difference between the purchase price and the markup price.
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