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How Investment Banks Raise Capital for Companies

By Brooks

There is a lot of emphasis put on financial services that help companies and businesses in the form of investment banking. This is due to the high profit that most of these financial services bring. To this effect, all companies want to do something to increase their portfolios and get better capitals as well. Capital can be increased in the form of bonds, stock transfer etc. but the biggest contribution to increase capital is made through investments. Companies mostly get good investment through investment banking. Some of the services of investment banks include raising financial capital by underwriting or by acting as client’s agent in the issuance of securities. Investment banking meaning and how they can help a company to raise fund is what some individuals are still to understand. Unlike other banks like retail and commercial banks, investment banks don’t take deposits.

The sell side and the buy side are the two main lines of business in investment banking. Sell side has to do with trading securities for cash and the promotion of securities. Buy side on the other hand has to do with the provision of advice to institutions that buy investment services. In essence, investment banks act as middlemen between a company and investors; this is when the company wants to issue stock or bonds. Investment banks assist a company in raising funds and with navigating regulatory requirements. Here we would focus on how investment banks raise money for companies and the roles of investment bankers in companies.

How Investment Banks Make Money for Companies

Banks are an essential part of the economy and play a very important role. In addition to their deposits and savings accounts, which is how banks make money, they are also engaged in a lot of different activities to raise money. One of the most complex financial mechanisms in the world is investment banking. That is, investment banks assist in large and complicated financial transactions. This might include advice as to how much a business is worth and how best to structure a deal. The assistance also includes the issuing of securities as a means of raising money for the company. They create the documentation needed for a company to go public. The biggest investment banks employ the best investment bankers that help plan and manage large projects for companies, governments and other groups. By performing the planning and managing clients’ activities, they save their client’s time and money by identifying risks that are linked with the project before the client moves forward. Most of the biggest investment banks are affiliated with or subsidiaries of larger banking institutions and have become household names. Investment banks are aimed at raising money or facilitating trade and investment on a huge scale in companies. But this is just a simple view of how banks make money. However, there is a lot to what these banks do. When investment banks work correctly, their services make markets more liquid, reduce doubt and get rid of disorganizations by smoothing out spreads. Most investment banks provide services to both corporations issuing securities and investors purchasing securities. When it comes to companies, investment bankers provide information on when and how to place their securities on the open market. Consequently, investment bankers have a very important role to play when it comes to issuing new security offerings. Below are some of the ways on how banks make money for companies through their services.

Underwriting of new stock issues: Companies that want to issue new securities and the buying public uses investment banks as middlemen. For example, when a company wants to issue new bonds to get funds to pay for a new project or an acquisition, the company hires the services of an investment bank. The job of the investment bank is to determine the value and riskiness of the business in order to underwrite, price and sale the new bonds. Other securities such as stocks are also made by banks through an initial public offering (IPO) or any subsequent secondary public offering. Investment banks ensure that the buying public commit to purchasing the stocks or bonds before it actually hits the market. Based on this, investment banks are mediators between the companies issuing the securities and the investing public. There are some risks that the investment banks will be unable to sell the shares for a higher price, causing them to lose money on the trade. To fight this risk, some of the biggest investment banks charge a flat fee for the underwriting process.

Risk management: One of the reasons why investment banking is important for most companies is that it help in the managing of risk in the companies. Risk management involves analyzing the market and credit risk that the companies take onto their balance sheet during transactions or trades. Risk management groups bring together expertise in diverse hedging instruments to develop a complete hedging strategy for the companies. The focus of credit risk is around capital market activities of the companies. These activities include bond insurance, syndicated loans, leveraged finance and restructuring. The key part of capital market transactions are credit risk solutions. They involve debt structuring, loan amendment, exit financing, leveraged buy-outs, project finance and sometimes portfolio hedging. Review for sales and trading activities is conducted by market risk using the VaR model. The review provides hedge-fund solutions to portfolio managers. Market risk activities provide service to companies by means of portfolio management, portfolio consulting, derivative solutions and risk advisory.

Sales and trading: One of primary functions of some of the biggest investment banks is the buying and selling of financial products. Investment banking meaning regarding trade is very important and can be done in two main ways. The first of these ways is through proprietary trading. That is by putting the investment banks capital at risk in trading. Proprietary trading is carried out by a special set of traders who do not border the companies. The second is trading for the companies. The best way of making money is when the bank has a large inventory of stock with high trade frequency. How banks make money here depends on each trade of the traders. However, investment banks traders main aim is to make money on each trade that they embark on. The traders do this by purchasing securities and other financial instruments at a price lower than the price at which they sell them to investors. They also make money by selling securities to investors at a higher price than they buy them back. In this way, they can make money in both falling and rising markets. The sales force of the investment banks is to propose to institutional and high-net-worth investors trading ideas and take orders. In the branded trading method, the investment bank uses its own capital into the financial markets. The traders of the companies look for arbitrage opportunities or extra strong, shorter-term investments. Smart traders who guess properly can make a lot of money very rapidly. On the other hand, bad traders tend to lose money and are in the risk of losing their jobs.

Brokerage and Swaps: Like old-fashioned mediators, investment banks connect sellers and buyers in different markets. Just because of this service, they charge commissions on trades that are done successfully. These trades range from megadeals trades to simple stock trades. Sometimes, Investment banks do make money through swaps. The tools by which two or more parties exchange their debt obligations in order to control more precisely each party’s desired risk/return profile are known as swaps. Swaps generate profit chances through a complex form of arbitrage. That is, the investment bank brokers create a deal between two companies that are trading their respective cash flows. The most common swaps happen whenever two parties understand they might mutually benefit from a change in a benchmark like interest rates or exchange rates. Why investment banking works with swaps is because different entities have different comparative benefits when pricing different categories of debt in different financial markets. Parties with contradictory credit ratings or financing needs can exchange their obligations in order to improve their financial structure and strategy.

Mergers and Acquisitions: One of the traditional ways of investment banks to raise money is called corporate finance. It involves helping companies to raise funds in capital market and giving advice on mergers and acquisitions (M&A). That is, through the subscription of investors to a security issuance, coordinating with bidders or negotiating with a merger target. Investment banks demand for fees to act as advisors for spinoffs, mergers and acquisitions. Concerning a spinoff, the target company sells a portion of its operation to improve productivity or inject cash flow. Whenever one company buys another company acquisitions occur. On the other hand, mergers occur when two companies combine to form one entity. These deals are often extremely complex and require a lot of legal and financial help, particularly for companies unfamiliar with the different processes.

Creating collateralized products: Lots of smaller loans like mortgages can be taken by investment banks, packaged and made into one tradeable security. The concept is to some extent similar to a bond-mutual fund and dissimilar in that the instrument is a collection of smaller debt obligation instead of corporate and government bonds. In order to make profit, investment banks have to buy the loans that is to be packaged for a cheap price so that they can sell them for higher prices on the market.
Selling of Research: Some of the biggest investment banks can also sell direct research to experts. The securities research department of the investment banks do reviews of companies and do a report about their prospects. The report focus on the buy, hold or sell rating of the companies. Typically, investment banks have sell-side analysts which cover different businesses. Although the research department might or might not generate revenue, its resources helps traders in trading and helps the sales force in proposing ideas to customers. It also helps investment bankers by covering their clients. The research department also serves outside clients like institutional investors and high-net-worth individuals with investment advice. They do this hoping that these clients will execute suggested trade ideas through the sales and trading division of the banks, thereby raising revenue for the companies. The research department of the investment banks also covers fixed income research, credit research, macroeconomic research, and quantitative analysis. All these are used internally and externally to advice clients but do not directly affect the income of the company. Group of research provides a key service in terms of strategy and advisory.

Management of assets: The management of asset can simply be defined as the business of handling others’ money. Investment management firms are usually financial services companies that invest their customers’ money in securities, debt, equities, commodities, derivatives and currencies. How banks make money can be through the services that they offer in the management of the companies’ asset. This can be done when the banks decide to manage the companies’ investments and invests on their behalf. By managing the asset, it gives the companies access to a wider range of product offerings than would be available to the average investor. Investment banks employ professionals who are experts at handling investment of companies’ and managing their money. The investment banking meaning here is to look at the particular need of the companies and recommends investment products, based on the asset allocation of the companies. Investment banking meaning also involves planning, recommending, and reviewing the investments of the companies. Why investment banking is important to companies is because they have the analytical skills and are able to assess which investment products will be beneficial for the companies. This is done to achieve companies’ desired financial objective within specified guidelines. The products in which professionals of investments banks invest the companies’ money are mutual funds, pension funds, hedge funds, retirement funds etc. in various financial vehicles.
The Role of Investment Bankers in Companies

The role of investment bankers is to act in a capital markets advisory capacity to companies and governments, instead of dealing directly with individual investors. Investment bankers help their customers to raise money in the capital markets. As a result, when the capital market is at its peak, investment bankers are also at their peak since they can produce more income from all the activities that they undertake. Investment banking is important in companies because they do provide useful roles in the allocation of money from investors to companies in an economy. These roles hopefully end up creating the wealth and jobs that the companies depend on. Every credit and success received by an investment bank is all due to the various investment bankers. These investment bankers duly act as the cogs making the well-known machine work. A company may seek the help of an investment banker should in case it wants to build a factory and is looking to issue bond financing to finance its expansion. As such, the investment banker will plan the bond issuance and price the bond issuance in order to create enough demand for the bonds. The required Securities and Exchange Commission (SEC) documentation needed to issue the bonds and help sell the bonds will be done by the investment banker. When it comes to equity financing, investment banker also has a role to play. The primary role of an investment banker is to act as an intermediary between a number of investors and companies through the process of Initial Public Offerings (IPOs). Investment banking meaning when it comes to facilitating the process of Initial Public Offerings (IPOs) is still not clear to many people. However, when any particular company decides to go public in order to seek equity funding, these underwriting services are provided by the investment banks to facilitate the process. For clear understanding, underwriting basically means buying a certain number of shares by an investment bank from a company based on their negotiations. On the stock exchange market, with the help of the investment bankers, these shares would then be resold by that investment banks. In order to arrange capital markets financing for its companies, investment bankers usually undertake the underwriting of deals. This implies that they manage the risk in-built in the process by buying the securities from the issuers and selling them to the general public or buyers from institutions. The securities are bought at a lower price by the investment bankers and sold for a higher price in order to generate profit that compensates for the risk they take on. This method is called the underwriting spread. Normally, one lead investment banker works with a collection of investment bankers who are known as syndicate in order to underwrite an issue. This is done so that the risk can be spread out among them. Another role of investment bankers is to act in the capacity of financial advisers for companies or businesses. These bankers provide direction and advise to the companies on a number of things like, how to make the companies go public, raising the required capital and many other financial aspects. Another one of the important roles of the investment bankers is Mergers and Acquisitions. Especially when it comes to evaluating companies financially, these professionals have the expertise. That is, investment bankers are also needed when a company is looking to buy another company. This is because the investment bankers give advice on how the company should go about the acquisition and also on the pricing of the offer. This has to do with given value to the targeted company and coming up with a price that represents its true value. In the same way, investment bankers are also needed to evaluate the price and offers of companies putting themselves up for sale. At times, mergers and acquisitions can involve a lengthy process and must be treated with care.

There are moments that investment bankers help their clients to raise capital through private placement, instead of taking on the cost of a public offering. For example, they can place an offering of bonds with an investor from an institution such as an insurance company or a retirement fund. This has proven to be one of the fastest ways to raise money since there is no need to register this sort of offering with the SEC. Why investment banking is also important is because they assist companies in structuring as well as facilitating various merger and acquisition contracts. Investment bankers are supposed to be one step ahead of all their contemporaries in order to ensure that they are performing all their roles on an optimal level. An excellent investment banking expert is so much aware of the fact that he or she needs to keep skills sharpened all the time.

Broadly speaking, there are two ways as to why investment banking professionals are needed in companies. The first reason why investment banking professionals are needed is counseling. The role of investment banking is just all about consultation and financial planning. Above all, this happens to be the main function of investment banking. The job of an investment banker who is working as a consultant involves guiding and providing the companies with advice on their activities when it comes to investments. The mergers or acquisitions of the companies can also be influenced by investment banking as well. This involves making available to the companies some advice on how they manage public assets and affairs. Brokerage and investment banking are fields that are somehow related. This is due to the fact that the jobs of an investment banker might also collide and complement that of a private broker who also gives advice about buying and selling assets to companies. The second of these ways as to why investment banking professionals are needed is for transactions. Investment banking also involves taking steps that are practical towards realizing what has been advised on. In larger companies, the jobs of investment banking can be limited to an advisory capacity since the larger companies prefer to think of the advice given and make the decisions themselves. On the other hand, for smaller companies that wish to grow, bringing an outside consultant to help out with the implementation of the advice given by the investment banking experts can be a really good choice. This is because companies that are small require more guidance.

In our economy today, investment banks help companies to raise the capital to finance various activities and grow their businesses. The investment bankers act as financial advisory intermediaries who help price capital and allocate it to various uses. Most of the biggest investment banks that a lot of finance job seekers strive to work for are JP Morgan and Chase, Credit Suisse, Goldman Sachs, Deutsche and so on.

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