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August 1, 2008

Functions of investment banker

Filed under: Business management — Jagdish Hiray @ 7:04 pm
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When corporation sells new securities to raise funds, the offering is called a primary issue. The agent responsible for finding buyers for these securities is called the investment banker. The investment banker purchase primary issue from corporation and arranges immediate resell of these securities to the investors. Merrill Lynch & Co., Goldman Sachs are some examples of well-known investment banking firms. Broadly investment bankers (investment banking firms) perform three functions: Investigation, Analysis and Research (Origination), Underwriting (Public Cash offerings) and Distribution. Most of time a single investor banker performs all functions, however some investment bankers are specialized in certain functional areas only.

 

Investigation, Analysis and Research (Origination):            Origination includes the subsidiary operations of discovery, investigation, and negotiation. Discovery is the finding of a prospective issue of securities; investigation is the testing of the investment credit of the prospective security issuer, and the intrinsic soundness of the issue; negotiation is the determination of the amount, the price, and the terms of the proposed issue. Investigation usually involves an analysis of the financial history of the corporation by accountants, investigation of legal factors, a survey of its physical property by engineers, and in-depth review of operations. The purpose of investigation and analysis is to determine whether a proposed issue has sufficient merit to be offered to investment community. In other words, function of investment banking is careful analysis of the soundness and reliability of the corporation whose securities are seeking the investment market. The task of investigation and analyzing the numerous factors, which govern the value of investment securities, varies considerably with the different types of issuing bodies.

 

Underwriting (Public Cash offerings): When a corporation wishes to issue new securities and sell them to the public, it makes an arrangement with an investment banker whereby the investment banker agrees to purchase the entire issue at a set price, known as underwriting. Underwriting also refers to the guarantee by the investment banker that the issuer will receive a certain minimum amount of cash for their new securities. The investment banker buys a new security issue, pays the issuer, and markets the securities. The underwriter’s compensation is the difference between the price at which the securities sold to the public, and the price paid to the company for the securities. Underwriting can be done either through negotiations between underwriter and the issuing company (called negotiated underwriting) or by competitive bidding. A negotiated underwriting is a negotiated agreed arrangement between the issuing firm and its investment banker. Most large corporations work with investment bankers with whom they have long-term relationship. In competitive bidding, the firm awards offering to investment banker that bid the highest price.

 

In certain cases, for large or risky issues a number of investment bankers get together as a group, they are referred to as syndicate. A syndicate is a temporary association of investment bankers brought together for the purpose of selling new securities. One investment banker is selected to manage the syndicate called the originating house, which does underwriting of the major amount of the issue. There are two types of underwriting syndicates, divided and undivided. In a divided syndicate, each member group has liability of selling a portion of offerings assigned to them. However, in undivided syndicate, each member group is liable for unsold securities up to the amount of its percentage participation irrespective of the number of securities that group has sold.

 

Distribution: Another function of investment banker it to market the security issues. The investment banker acts as a specialist to distribute securities efficiently for the corporation. It can be very expensive and ineffective for a corporation to sell an issue by establishing marking and selling organization by its own. Investment banker has established marketing and sales network to distribute securities. For a reputed invest banker, with its past history of selecting good companies and pricing securities builds a broad client base over time, and further increases the efficiency with which securities can be sold.

 

            Invest banker offers security to both corporation issuing securities and investors buying securities. For corporations investment banker offers definite price guaranty on a certain date for securities to offer. The corporation runs no risk of the uncertainties of the market and do not have to spend on resources with which it is not equipped with.

To the investor, the responsible investment banker offers protection against unsafe securities. The offering of a few unsound issues can caused serious loss to its reputation, and hence loss of business. Therefore, investment banker play very important role in issuing new security offerings.

 

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28 Comments »

  1. Hi. I am a long time reader. I wanted to say that I like your blog and the layout.

    Peter Quinn

    Comment by Peter Quinn — August 1, 2008 @ 7:59 pm | Reply

  2. [...] Functions of investment bankerBroadly investment bankers (investment banking firms) perform three functions: Investigation, Analysis and Research (Origination), Underwriting (Public Cash offerings) and Distribution. Most of time a single investor banker performs all … [...]

    Pingback by Investment-Bankers » Investment Bankers — August 4, 2008 @ 1:06 am | Reply

  3. I really like this blog, you are a great help on management subjects!!

    Comment by chittal — July 28, 2009 @ 8:35 pm | Reply

  4. I fallen in love with your blog. It is second to none for those who need help on investment dynamics.

    Comment by Paul Edem Kuenyefu — November 16, 2009 @ 11:00 am | Reply

    • Thank you Paul, Chittal, Peter.

      Comment by Jagdish Hiray — November 16, 2009 @ 1:04 pm | Reply

  5. i just wanted to say thank you. because with information like this i know im going to pass my business management courses and not just pass but know what im doing and talking about. thank you.

    Comment by lauren — January 15, 2010 @ 3:51 pm | Reply

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    Comment by vijay kumar — March 27, 2010 @ 7:08 am | Reply

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    Naomi

    Comment by Naomi Monnakgotla — April 8, 2010 @ 2:23 am | Reply

  8. I like this site. It helped me with my business class assignment for college. It gave me a good idea of what investment bankers do any why it is important to have one.

    Comment by Anna — July 28, 2010 @ 8:31 am | Reply

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    Comment by JAYESH — April 22, 2011 @ 12:12 pm | Reply

  10. Wonderful lecture indeed!This is certainly improving our knowledge and understanding abt investment.will like to read more of these.PSAG

    Comment by Edward Agama — June 25, 2011 @ 3:13 am | Reply

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    Comment by nadira — July 6, 2011 @ 1:01 am | Reply

  12. Am thankful about the functions of investment banke, thanx alot.

    Comment by Emily ochola — July 16, 2011 @ 4:59 am | Reply

  13. Oh, this post really helped me to prepare for examination of investment.
    my course book has lots of points with no-sense regarding investment banking. so, thanks from heart !

    Comment by Vijay KC — September 13, 2011 @ 4:36 pm | Reply

  14. Valuable information indeed. I have derived great information about investment banking, and i now know the benefits to be derived from investment banking. I surely should pass my forthcoming Corporate Finance exam with a Distinction!

    Comment by Hensley Madamombe — December 11, 2011 @ 5:32 am | Reply

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    Comment by Kathy — February 18, 2012 @ 2:02 am | Reply

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  20. Thank you very much for such nice explanation of functions of Investment Banking

    Comment by Das — August 2, 2012 @ 2:47 am | Reply

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    Comment by Samridhi — September 24, 2012 @ 5:45 am | Reply

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    Comment by Alberta — November 12, 2012 @ 11:33 am | Reply

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    Comment by Fasciola — October 29, 2013 @ 9:21 am | Reply


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