Investment banking is the process by which financial institutions help individuals, companies, and governments in raising or creating capital. Typically, in a bank, its business divisions can be divided into retail, corporate/commercial, global, private, and finally investment banking.
The investment banking division specializes in helping companies to list their shares in the market and underwrite debt and equity issuances in the secondary market. However, more and more investment banks are also offering asset management, mergers, and acquisitions, and brokerage services to diversify their revenue base.
Most importantly, investment banking plays a crucial role in a company’s growth plans to expand its businesses and generate more revenue. It acts as the broker between the company and the investing public and conducts proper due diligence to determine whether the company is fundamentally sound to go public or issue additional debt and equities in the market.
Think of investment bankers as the salesman, marketeer, and analyst in helping to sell the company’s shares and debt to investors. One of the main strengths of investment banking in this regard is the ability to secure significant cornerstone investors through the investment bank’s connections in the market.
The investment bank then generates revenue through a fee for its services and also commissions from the successful sales of the company’s shares and debt. This is typically called the sell-side of investment banking.
Investment banking is typically one of the most lucrative business for a bank considering its potential to generate higher than normal revenue.
Key Features of Investment Banking
- Investment banking divisions employ the brightest talents in the industry considering the high sophistication of helping a company to raise capital.
- The success of investment banking relies heavily on its ability to secure reputable institutions as cornerstone investors. This increases the appeal of the company in the market.
- Investment banking adds value to companies by increasing the efficiency of raising funds from the market without spending too much resources on doing so.