Understanding Investment Banking And Its Benefits Finance Essay - Free Essay Example

The word investment banking draws idea of investment into our minds or thoughts. Actually that idea is quite closer to the basic interpretations of a layman but in realty word Investment Banking holds quite a lot and it is much bigger than basic ideas. Main core sense of Investment banking is developing and executing decisions on capital markets to build new resources of clients. This prime decision holds property rights, laws, current market place, information etc which stays important to investors. Operation of investment banking solely depends on the reputations and relationships in the financial world; it helps to establish a fluent network and identifying informal contracts. Investment Banking can restructure the capital markets. Returns earned by the firms or clients are mostly results of decisions by Investment bankers and it plays vital role many times. Retail banks are banking institutions which carry transactions directly with consumers, rather than corporations or other banks. Services they can offer includes savings and transactional accounts, mortgages, personal loans, debit cards, credit cards etc. While a commercial bank collects deposits for checking and savings accounts or current accounts from consumers or public and offers them loans and collects interest or pays interests to depositors The investment banks involve helping customers t o raise funds in the capital markets and provide an advice on mergers and acquisitions. This unit also attract more customers by their advertisement pattern. So work forces in these units are frequently extremely stressful and degrading in nature. Investment banking also provides interest to investor clients to a security issuance by subscribing them, be coordinative with bidders, or managing with a merger target. Mainly the investment banking is assistance MA and corporate finance. The division investment banking division (IBD) is generally divided into coverage of industry and product groups. Industry coverage groups points on a specific industry such as drafting to law, industrials, technology, and maintain contacts with corporations among the industry to bring businesses to a bank. A product coverage group diverts interest on financial merchandise, such as MA, leveraged finance, equity, and high-grade debt. Management in investment banking is really a professional management of various securities such as shares, bonds, etc. and other assets to meet special investment goals for the benefit of the investors. Here Investors may include different types of institutions like insurance companies, pension funds, corporation etc. Whereas private investors consist of investment contracts and schemes. The investment management division of an investment bank is generally divided into separate groups which are: Private Wealth Management Private Client Services Asset Management for making a specific market, because clients invest or trade in with financial products according to the goal of making rise in amount of money for each trade. Sales team of investment banks whose job is to call on clients and worthy investors to propose trading ideas and take orders. Sales desks ensure interacting to clients orders to capture trading desks, which can price and execute trades and to form structure of the new products that fit the desired need of client. Researc h division reviews companies and writes reports about their expectations with own ratings on products. Main motive of this division is to guide traders for trading; the sales force motive is to recommend ideas to customers and investment bankers by addressing their clients. Division does not generate any revenue to the bank rather works on attracting customers. Recently existence of the connection between investment banking and exploration has become influenced for segregation of between public and private functions. Strategy division advises are explicitly or implicitly in nature to clients on the strategies that can be adopted in various markets. Strategists of the bank develop new innovative strategies to place companies and industries in a valued structure with full consideration of the macroeconomic market. Strategy division of the bank regulates the way the firm will function in the market, leading the way of direction it would like to take in terms of its proprietorship an d flow positions, making the suggestions for salespersons for interacting with clients, as well as the way of restructuring new products. Above specified Structuring has been more recent design with highly technical and enumerate employees working on creating composite structured products which typically for large border and returns than fundamental cash base. Middle office Major role of middle office is Risk management which involves analyzing the market and risk in providing credit that traders are taking for their routine trades, and assuring limits on the amount of capital involved of the bank to prevent bad trades having a damaging effect. Another key role of Middle Office is to ensure that the economic risks are captured accurately, correctly and executed on time. Recently the risk of errors has become common and known as operational risk and so the assurance of Middle Offices provides measures to cover this risk. When this assurance is not guaranteed in place, market and credit then risk analysis can be undependable and open to deliberate manipulation. Finance areas are mostly creditworthy for an investment banks capital management and risk supervising. By figuring and examining the capital flows for the firm, the Finance division is the primary adviser to senior management on optimum areas such as checking the firms global risk exposure, th e profitability and system of the firm through various businesses. Back office A back office handles operations involving data-checking of trades that have been performed, assuring that they are not bad, and transacting the required transfers of funds. A degree of finance has proved to be vital in understanding the idea of the deals and transactions that happen all over the divisions of the investment bank. Back office is aligned with technology like the information technology department composed of real high quality softwares made by its technology team to provide technical support due to the recent march of electronic trading at trading desk of the bank. Categories of Investment Bank Bulge Bracket Investment Banks: today due to merging different types of banks a group of investment bank is formed known as Bulge Bracket Investment Bank. For example: Merrill Lynch and Morgan Stanley, Lehman Brothers. Major Bracket Firms and Foreign Banks: these are the banks which do not fall within the bulge bracket, so they affiliate with different commercial banks to build an investment bank organization. For example: JP Morgan and CS First Boston Regional Firms and Investment Banking in Commercial Banks: in recent times many regional firms have merged with commercial banks to be an investment bank. This banks do not provide level mobility like bulge bracket banks. For example: Hambrecht Quist, Nations Bank Montgomery Securities, Robertson, Stephens (Bank of America) in San Francisco Boutique Banks: it is a small investment bank that specializes in specific investment banking. These banks target on particular industries or products. For example: Broadview Associat es. Functions of Investment Banking https://kona.kontera.com/javascript/lib/imgs/grey_loader.gif Investment banks have versatile functions to perform. Some of the most important functions of investment banking are as follows: Raising of capitals An investment bank guides a firm for raising funds to achieve desired objectives, such as acquirement of another company, reduce in debt load, expanding existing operations for a particular project financing. Capital is composed of debt, common equity, preferred equity, and securities like convertible debt or debt with warrants. Although people are interested in raising capital to public stock offerings, a great amount of capital is mainly raised through private placements with institutions, differentiated investment funds and private individuals. The structuring on transaction for specific objectives for attractive investors is done by the assistance and work of an investment bank to clients. Assisting on Mergers and Acquisitions (MA) Mergers and Acquisitions is activity including many financial transactions and crucial financial decisions to be executed. Thus, an Investment banks represents a sound financial institution in mergers, acquisitions, and divestitures. Assistance of investment bank is most appropriate in MA between any companies. Investment banks detailed analysis helps in entity bought or sold; with its valuation range and desired structure while performing the acquisition of a particular firm, the sale of any company or its subsidiary, and assistance in identifying, restructuring and executing a merger or joint venture. Trading and sales Investment bank majorly indulges in services are relevant to publicly traded firms, or any firms which plan to go public for near future. Particularity functions include making a market in existing stocks, placing new offerings to clients, and publish its research reports. Investment consultancy Advisory services handled by the investment bank deals with assignments such as strategic planning, valuations of businesses, assisting in financial reframing, and providing a view as to the goodness of a proposed transaction by their consultants. Factors affecting break down of an Investment Bank Corporate Finance The prominent responsibility of a traditional investment bank is to handle corporate finance as it performs two different functions: Mergers and acquisitions advisory and Proprietorship. On the mergers and acquisitions (MA) advisory of corporate finance, their bankers assist in collaborating and structuring a merger between companies. For example, a company wants a firm, and then an investment bank will assist by providing decisions to finalise the purchase price, manner of the deal, and generally accounting an easy transaction. The insuring function with corporate finance takes holding the process of incresing capital for a company. It is a main factor affecting breakdown of bank because mostly capitals are aroused by moving out of stocks or bonding to investors. Sales Sale is another main essence component of any investment bank. Here Salespeople comprise of: The classic retail broker The institutional salesperson The private client service representative. Retail brokers develop relationships with applying investors individually and sell stocks and consult stock advice. Banks salespeople build business relationships with big institutional investors. Institutional investors are those investors comprising of large groups with good assets. Private Client Service (PCS) representatives exist between retail brokers and institutional salespeople, who manage brokerage and money management services for wealthy individuals. Thus conflicts among sales group or inefficient work or output destroys the operation of the investment bank, hence can create the line of break down to the bank during any time. Trading Traders always remain effective for the investment bank. Traders indulge themselves in the act of buying and disposing of stock, bonds, or other securities like forex, either by dealing an stocktaking of securities for sale or by performing a given trade. Traders deal with transactions of large and small in nature and provide liquidity for the market. This also called as market making. So traders market behaviour is mostly the reason of market movement and their way of operations or trading may be bad for market. Hence can be wildly effective to an investment bank and can lead to break down Research Research analysts of an investment bank observe stocks and bonds and make good word on their analyzing to buy, sell, or hold those securities so poor or bad research can lead to false recommendation. Some research analysts are assigned to work on the fixed income side to cover a particular segment. Irrelevant draw by these analysts may affect other segments creating wholesome decline. Corporate finance bankers are dependable on members of research analysis to lead the industry in which they are working. Honourable researchers can generate significant corporate finance business as well as satisfying trading activity but their bad research can ruin the investment bank. Syndicate The centre of the investment banking is to build a consortium by providing a critical connection between salespeople and corporate finance. Syndicate among themselves fulfil to facilitate the placing of securities as per public offering, a fall out can drag on relation between and among buyers of offerings and the investment banks dealing the process ending in poor administration. In a corporate or governmental liabilities deal processes syndicate determines the allocation of bonds and other procedures. The breakdown of these fundamental areas can have a huge impact on an investment bank. Investors evaluation for Investment Bank Investment banking is actually business providing services to the clients, firms or companies; expecting total service for their desired investment. While this bank deals with large client firms. So they undergo evaluation for selecting bank for proper guidance and service by analyzing criteria like: Services Offered Servicing by the bank should perfect, on time and qualitative to manage the project of the client. For example, majorly projects will include detailed industry idea and financial analysis on particular subjects, preparation of appropriate documentation such as an offering memorandum or presenting to the Board of Directors, developing scope of legality, assistance on various stages, negotiating the terms of the transaction, accounting, and other advisors guiding in all phases of the project for successful completion. Ability to Work Quickly As said time is money, investment banking projects have very specific deadlines so should be ended on time. For example any bidding company is for sales agreement. The investment bank must be unforced and able to put the correct people on the project at correct time and work efficiently to meet critical deadlines. Experience It is highly important to make sure that how experienced is the bank and its senior members will be participating in the project on a daily basis. This is calculated on their past performance depending on handling of all cases of dealing, it may be advisable to work with a bank that have renowned background or successful end of a contract with other bodies in the market or in required industrial segment. The investment bank should have a highly developed network of to the point contacts, such as possible investors or companies that could be approachable for acquisition. Fee Structure Mainly investment bank charges for its services and guidance provided with an initial retainer fee. In time of one-time or monthly, where the majority of the fee depending on successful end of the transaction. It is important to apply a fee demand that lines up the investment banks incentive with your consent. Record of Success Though no respectable investment bank will assure the success, the firm must have a respectable record of closing dealings. Ongoing Support After dealing on a transaction for our company, the investment bank becomes closely with your business. After the end of transaction, a decent investment bank should become a hoped business advisor consultancy that can be called upon with no consent for advice and give support on any ongoing basis. As investment banks are mediators, they are not providers of capital; some executives avoid bank to carry out the transactions in order to avoid the fees. India and Investment Banking Investment banking in India plays very essential role for the fluent flow of market transactions between many investors, companies, firms and the government. As these banks will have heavy role to play even in the future, regardless of the economic conditions of the country. Investment banking banks help their clients to accession of capital through debt, equity and other kinds of investment products. These firms handle trades in equities and derivatives of Indian market. The major role this type of banks is to help great companies with merger and acquisition deals like TATA, Reliance, and Mahindra. About a couple of years back in global recession of 2008 some investment banks collapsed or were on the edge of closure. This led to many sceptics writing off the revival of these firms. The segment of the Corporate Investment Banking has developed in recent past. This happened by performing Corporate Advisory Services to leading firms in the Indian market. But when it approaches to banks in India, the line that segments investment banks from other banks is rather light and ends to slow development in Investment Banking in India. There could be many reasons but important ones are Investment banking for corporates is still a new field and Every bank no matter of its field wants to provide its customers with the best service. So almost every bank provides its customers corporate finance solutions too. Future of Investment Banking in Indian Markets Economic Slowdown revealed that only the strong can ride on the tough roads and still remain stable. Those sceptical should realize that the market has its own movements by its cycle and downturns. If anyone would have glance at the financial strength of Indian companies, you just cannot ignore them. As these companies have ability to bounce back once again. Moreover, the futurity of Investment banking companies in India seems good developing and could grow even more bigger in future with the march of some greatest MA to Indian companies CONCLUSION To my study so far Investment Banking managing in areas of Public, Private and MNC segments with a good mix in terms of size. Here participation of Investment Banks operating in India should govern its senior management as it provides rich content and valuable insights to great companies and firms. Analysing emerging trends in Banking and Technology should be their prime focus of development. Results of this may create a technological innovation and a key factor in growth and value creation in the banking industry. Banks are deploying technology for implementing differentiated strategy and risk management frameworks. My study on Investment Banking shows the weaving of combination in technology management as per the course: MBA-TECH by MPSTME, NMIMS. However complexity in development of Investment Banking in India would be due to: Consolidation New processing and operating models Convergence of financial products Homogeneous services Repositioning of exchanges Capital intensity Short innovation cycles Globalisation and new players in capital markets Cross-border volume drivers Traditional structures eroding Cross-border investment flows Impact of the Internet and online services Convergence of financial products APPENDIX I