Investment Banking - Definition, What is Investment Banking, Advantages of Investment Banking, and Latest News - ClearTax (2024)

Introduction

How often have you heard about large companies or organisations making acquisitions and merging with other companies by buying off the maximum market shares? You must have wondered how these companies know when and where to invest such a large amount of money to reap the maximum benefits! Well, this is where investment banking comes into play. Any corporation, large or small needs advice before making any kind of investment as they are putting their hard earned money as well as reputation on the line. To ensure that the investment they make is fruitful, they need some advice and guidance from someone who is an expert in such investments and will guide them through the risks and benefits of the concerned plan. This individual is called an investment banker. Operations in the financial field are tricky and they can become even trickier when it comes to large companies, organisations and Government. This is why the investment banking service has been brought into action to make investments a little more convenient for such large entities.

Although given by the above example, investment banking may seem like just a service provided by banks, the term goes way deeper and there are full-fledged investment banks present to help high income individuals, corporations, organisations and even governments in their investment planning. This is why to understand the term “investment banking” in a little more detail, we would need to go through its basics and understand how it works.

What is Investment Banking?

Investment banking is essentially a financial service provided by a finance company or a banking division to help large multinational corporations in their investment plans. Along with large companies and organisations, this service also helps high net worth individuals and governments to raise or create capital. Some of the important roles that an investment bank plays are to underwrite new securities for all types of organisations, assist in sales of securities, and to arrange for mergers, acquisitions and reorganisations.

Investment banks aim at providing a way to large organisations, corporations and governments to make large financial transactions and make important financial decisions with some help. In order to do that the investment banks may often help companies to issue their IPOs or Initial Public Offerings. When doing so, these investment banks will sell the shares on the market on behalf of the company.

In simple terms, you can say that investment banks act as financial advisors to large companies, organisations and governments. These advisors advise the companies regarding the sales and trading that takes place between buyers and sellers and assist them in making large financial deals that take place during activities like acquisitions and mergers.

Companies often turn to an individual who will advise them about which investment will be fruitful for their company and which will cause them to potentially suffer with losses in the future. This person is an expert who understands the feasibility of large projects and has a thorough knowledge about investing. This person is called an investment banker. The investment banker will identify the risks associated with a said project and convey it to their client before the client can go on to invest in the project. This goes a long way in saving the client’s time as well as money.

How does Investment Banking Work?

Investment banking service is offered by the investment banks that act as an intermediary between company and investors and primarily deals with shares and stock exchanges. The investment banking service helps the large companies and organisations in making and creating a viable plan for investments which involves the proper pricing of the financial instruments. An investment bank buys most of the shares directly on behalf of the company when the company holds an IPO or Initial Public Offer.

These shares are then sold on the market by the investment bank, which is now acting as a proxy to the company. By doing so, the investment bank maximises the company's revenue while also making sure that all the regulatory policies are being followed. By helping the company to gain maximum profit from this action, the investment bank also gains profit by marking up on the initial price of shares while selling it to investors. The investment bank also faces a risk of losing money by selling the stock at a lesser price if a situation arises in the market where the stock becomes overvalued.

When going to an investor banker for advice, a company should consider its needs to do so and weigh out all its options first. There are certain important factors that the company needs to consider before visiting an investment bank. These factors include the size of the capital that is being raised and the competition in the market. Once the company is clear in these aspects it can take the help of the investment banker to research new ventures to invest in.

Benefits of Investment Banking

As we already discussed above, there are a lot of ways in which investment banking helps large companies to take important financial decisions and ensure that they reap maximum profits. This is why investment banks are a popular financial institution among such companies and even governments. In that sense, we can say that investment banking and investment banks have a number of benefits which can be fruitfully used by the large organisations and companies. Few of these benefits of taking assistance of an investment bank are as follows:

• Investment banks handle their clients efficiently and assist them with the necessary knowledge about the risks and benefits of investing their money in other companies or organisations.
• These banks act as an intermediary between the company and the investor by assuring a rising of financial capital through assisting in important financial investments like acquisitions or mergers.
• It undergoes thorough investigation of the deal and project that is to be made by its client in order to assure that the client’s money goes in a safe place which will help to minimise the risks associated with the said deal or project.