Types of Services Offered by Investment Banks

Investment banks are the financial entities that act as intermediaries between corporations and investors. These banks have advisory divisions, trading divisions and retail banking divisions. These divisions make money through different mediums. The advisory division is paid for its services. They also issue securities to raise for the client and create documentation for the company to go public. 

 

Table of Contents

• Investment Banking Services
• Commitments
• Investment Banking Skills

Investment banks help in issuing shares of stocks in IPO and additional stock offerings. They also examine the company’s financial statements for accuracy. This article will help you learn about the investment banking services in detail. Investment banking is the division of financial institutions that works for corporations and governments through underwriting, mergers and acquisitions advisory services. To understand this concept, first of all, we need to learn about the entities that offer investment banking services. Such entities are commonly known as Investment banks. 

Investment Banking Services

Investment banks offer a range of services including underwriting, sales, equity research, asset management, etc. Let us now discuss these services in detail. 

1. Underwriting

Through underwriting, banks raise capital for their clients from investors in the form of equity and debt securities. Underwriting advisory services are in three phases: planning, timing and demand and issue structure.

Planning: In the planning phase, the main objective is to understand the rationale of the investment and investor demand.

Timing and Demand: These factors are crucial for successful capital raising. To assess the timing and demand of an offering, you need to consider the following factors:

• Current market condition
• Current investor appetite
• Investor experience
• Precedents and benchmark offerings
• Current news flow

Issue Structure: In the final phase of underwriting, it is crucial to decide the structure of an offering. You need to consider the following questions while working on the issue structure:

• Is it a domestic or international issue? 
• Are investors interested in this offering?
• How will the sale occur?

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2. Mergers & Acquisitions (M&A)

Investment banking also includes Mergers and acquisition services. It is the consolidation of companies and assets through various financial transactions. These include acquisitions, consolidations, mergers, assets purchase and management acquisitions. In mergers, the board of directors approve the combination of companies and seek the approval of shareholder. In case of acquisition, one of the companies acquires another company. The acquiring company obtains majority stakes in the acquired firm. 

3. Sales & Trading

Within investment banking, sales and trading groups are the agents for clients. Salespeople call institutional investors with opportunities. Traders execute orders and advise clients in case of the ‘enter’ and ‘exit’ financial positions. Let us understand these two in detail.

Sales

Sales department of investment banking maintains relationships with institutional and retail clients. Sales professionals understand clients' needs and investment profiles. They act as intermediaries between traders and clients. These professionals relay this information to traders who execute the trades. Their roles include:

• Salespeople keep clients informed about market opportunities and financial products.
• They suggest investment strategies or products based on client needs.
• Sales professionals coordinate with various departments within the bank.

Trading

One of the essential investment services includes trading. Investment banks are involved in buying and selling financial instruments in financial markets. Traders aim to profit from market movements. They also manage risk, including hedging strategies to protect against market volatility. Traders are classified into several types based on their specific roles:

• Traders buy and sell financial products with the bank's capital to facilitate client transactions.
• They trade with the firm's money to make direct gains from the market.
• Traders regulated liquidity in the markets by buying and selling securities to ensure that trading is smooth.

4. Equity Research

In investment banking, equity research professionals perform analysis and produce reports on investment opportunities for clients. The aim of equity banking is to offer clients recommendations on whether to buy, sell or hold their investments. 

5. Asset Management

In investment banking, asset management is the management of investment funds. It involves investment in stocks, derivatives, fixed income stocks and other investments. There are various asset management products that are managed through separate accounts. 

Commitments Offered by Investment Banks

There are three types of commitments made by the investment bank: 

1. Firm commitment: Underwriters agree to buy the entire issue at a fixed price. If underwriters fail to sell the entire issue, they must take full financial responsibility for any unsold shares.

2. Best efforts: Even though underwriters commit to selling the issue at the agreed price, there is no legal or financial responsibility for any unsold issue.

3. All-or-none: Until the entire issue is sold at the offering price, the deal is considered to be void. In such a case, the underwriter will not receive any compensation.

Investment Banking Skills

Anyone who wants to get into the field of investment banking requires knowledge of financial modelling. As an investment banking professional, you must have the knowledge of Excel and valuation methods to advise your clients to close deals. The following skills are required for such professionals:

• Performing financial modelling activities such as building financial models.
• Using various valuation methods such as precedent transactions, comparable company analysis and DCF analysis.
• Building presentations and pitchbooks to pitch ideas to prospects and gain more business.
• Preparing financial documents such as term sheets, confidentiality agreements, investment teasers, building a data room, and much more (check out CFI’s library of free transaction templates).
• Negotiating transactions between buyers and sellers and maximizing value creation.