It is common to read or hear about Investment Bank and the banking system. The most common aspects to hear about these banks are that their employees receive a huge pay packet which is drawn from the profits these banks reap from investor’s money. The banks are also criticized for the financial crisis which they create in the market that hurts investors. All these conclusions arrive from ignorance or lack of knowledge about these banks and the banking system they follow.
To start with, Investment banks do not operate like the normal commercial banks that we are most familiar with. Individuals cannot approach an Investment Bank and expect them to accept deposits for holding in their account. The function of these banks is rather for selling or purchasing, stocks, bonds and such other financial instruments. Investment banking therefore refers to that process which helps companies in raising capital. It could also deal with a process which assists the company in mergers and new acquisitions. A commercial bank could therefore have a separate division which handles these aspects and normally that is termed as the Corporate Finance team or division, as the case may be.
Raising capital or buying and selling
Experts in this group would work with companies and set up their Initial Public Offer (IPO). For a company which already has a steady cash flow the Investment Banking staff would assist in issuing additional stocks shares. While this is one manner of raising capital, there is also the process of private placements where private equity groups are involved in raising the required capital. When the situation so comes up where the company needs to be sold out, the Investment Banking section would help identify potential buyers, then do the necessary negotiations for the actual sale process. There could also be the scenario where an existing company acquires another one, where also the investment banking staff would advise on the pros and cons. The potential acquisition would be studied and an opinion termed the fairness opinion would be rendered to the company by the Investment Banking people.
Investment Banking and its research function
To analyse a company, writing a report which portraits down and deduce the performance potential of the company is the work of Investment Banking staff. These people are most times seen during breakfast shows talking about the company or stock and its performance. While this section of the Investment Banking system does not generate any income directly, it plays a major role that affects the volume of trade. Based on a research analysts comment or opinion on a stock,there are numerous of investors who would react immediately in the actual financial market. Similarly, a research analyst speaking high about a company that is about to launch some IPO, will automatically mean higher demand for the shares in the market when it opens for the issue.
Chinese wall in Investment banking system
It can be seen easily from the above Para, that there is a very dangerous factor of the research wing being able to swing public opinion one way or another. To counter such a swift and easy swing from taking place, a Chinese Wall is placed in every Investment Banking system. The purpose of this wall is to ensure that the sakes and trading details of the Investment Bank will not be known to the Research division.