Investment Bank – Definition

Cite this article as:"Investment Bank – Definition," in The Business Professor, updated May 30, 2019, last accessed June 1, 2020, https://thebusinessprofessor.com/lesson/investment-bank-definition/.

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Investment Bank (IB) Definition

An investment bank is a financial institution that performs a variety of duties. It is a financial organisation that offers corporate financing services, advisory services and direction for its clients on all financial matters including mergers and acquisitions.

An investment bank offers underwriting services for IPOs, represent its clients in complex financial transactions, render investment and financial advice, guide its clients on mergers and acquisitions and also act as a link between a security issuer and an investor.

JP Morgan, Morgan Stanley, Credit Suisse, Deutsche Bank, Citibank, Bank of America – Merrill Lynch, and few others are examples of renowned investment banks.

A Little More on What is an Investment Bank

Investment banks offer professional services which include the following;

  • Execution of financial transactions- investment banks, with the permission of a client, execute seemingly complex financial transactions on behalf of the client. They also advise clients on transactions.
  • Underwriting services- investment banks perform the roles of underwriters in Initial Public offerings (IPOs). Underwriting is a strategy through which investment capitals are raised on behalf of a security issuer, who might be an individual or a corporation.
  • Advisory services- This is an essential function that investment banks perform. They offer investment and financial advice to clients in exchange for a fee or for a percentage of the securities they are trading.
  • Trade and sales of equities – an investment bank can act as an intermediary between issuing companies and investors (buyers) in a stock transaction. It can also trade and sell equities directly to maximize profit.

Investment banks operate at different levels, while some are large and function in the global market, some operate locally. Big investment companies often have reputable  clients all over the world while smaller investment banks are renowned locally.

Usually, investment banks have different divisions that assume specific responsibilities. For instance, a division handles trading and sales in investment market while another manages clients’ accounts. Since these divisions have distinct roles, it is important that they are separated and operate autonomously so as to avoid conflicts.

Examples of corporations that seek the service of investment banks include the government, pension funds, corporate organizations and financial institutions.

Investment Banks as Financial Intermediaries

An investment bank gives the profile of a potential company to clients, after analyzing the company’s financial statement. An investment bank can also act as a middle man that facilitates financial transaction between two parties. When this happens, the investment bank is playing the role of a financial intermediary. Investment banks act as Intermediaries by performing underwriting functions during Initial Public Offerings (IPOs).

Investment Banks guide investors (usually their clients) through security transactions and processes. They also facilitates follow-on share offering to help investors get capital from the market.

Investment Banks as Financial Advisors

Whether operating globally or domestically, Investment banks are responsible for the finances and investments of their clients. Since many investment banks work with corporate clients, they perform the role of corporate advisors in financial and investment transactions.

Investment banks understand that the ultimate aim of all investors is to reach certain financial goals and make profit. This is why investment banks essentially advise clients when transacting in exchange market or global securities markets. They also support investors through the preparation of strategies that can help them shoot opportunities in the markets and reach their financial goals.

Role of Investment Banks in Mergers and Acquisitions

Mergers and acquisitions are important transactions in which investment banks play a major role. Primarily, investment banks manage assets for their clients, so when supervising mergers and acquisitions, they evaluate the worth of assets that are about to be merged it acquired in order to negotiate a fair deal.

Investments banks ultimately have the responsibility of establishing and fair deal of price for assets and companies involved in mergers and acquisitions transactions. Also, investment banks facilitate transactions of this nature, in order to ensure the smooth flow and fair processes for both parties involved. Hence, it is the duty of an investment bank to ensure that no issues occur in the execution of the deal and a fair worth is established in the transaction.

The Research Division of investment bank

An investment bank has divisions, these divisions have significant roles they play. The research division is a branch of investment bank that had the responsibility of periodically researching and reviewing companies, their assets, ratings, transactions and performance in the market. The research division then comes up with reports about conducted reviews to help investors and traders make their choices when looking for a company to trade or transact with. The reviews and reports that the research division provides is helpful for traders and investors in maximizing profit in the market.

The small world of Canadian capital markets: Statistical mechanics of investment bank syndicate networks, 1952–1989, Baum, J. A., Rowley, T. J., & Shipilov, A. V. (2004). Canadian Journal of Administrative Sciences/Revue Canadienne des Sciences de l’Administration, 21(4), 307-325.

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