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What is Investment Banking & How it works

Investment banking is a specialized division of banking operations and its working is very different from regular banks. While regular banks take deposits from consumers and offer services like loans, etc., investment banks offer advisory services to corporate and other major clients to raise funds or buy/sell/trade in the market.

So here’s all you need to know about investment banking!

1) What is investment banking?

Investment banking is a division of banking that plays a major role in corporate deals, trades, raising funds, etc. Be it a merger & acquisition (M&A), or companies wanting to go public with an IPO, raising funds through different mediums, purchase of assets, investment banks act as advisory and intermediaries to their clients. The due diligence, market study, legal procedures is taken care of by investment banks.

2) Who are the main clients of investment banks?

Investment banks clients may include:

  • CorporatesOperational companies belonging to all sectors
  • Governments:Sovereigns and governments also opt for investment bank services
  • FundsIncludes hedge funds, private equity funds, pension funds, etc.
  • strong>High Networth Individuals (HNIs): Individuals that hold assets worth $1 million or more

The bank also makes investments for itself to make money or safeguard itself from market risks.

3) What do investment banks actually do?

An investment bank’s main activities include:

  • Advisory servicesInvestment banks advise clients on required actions based on their want or need; this may include financial structuring, raising funds, buying/selling/merging companies, buying assets/financial products, financial risk management, etc.
  • Investment management: They also advise on and manage investments for HNIs and corporates
  • FinancingInvestment banks provide loans to their clients. In certain cases, the bank may buy a corporate client’s shares or assist the client in looking for any other party who may be interested to invest in the client’s business.
  • Raising funds: Help corporates or sovereigns raise money in the equity or debt markets
  • Trading:An investment bank may trade in equity shares, debt market, commodities, derivatives, etc. to make money for the client or even to earn for itself.
  • Research: A segment of investment banking focusses on tracking economic, market & industry trends to profit the client or its own business.

4) How do investment banks make money?

Investment banks earn through the following ways:

  • FeesInvestment banks charge fees to their clients for the services provided
  • Interest: This income comes from the loans given out
  • Investments: The profits earned on investments made by the bank in companies, mutual funds, etc.
  • Dividends: This comes from the bank’s investments in shares, etc.
  • Trading: The money made from buying and selling securities

5) What is the need of investment banks?

Investment banks play a major role in big business deals & investment decisions. They not only advise on potential business deals, best methods to raise funds and other financial strategies, but also assist in the due diligence in case of purchases of companies, procedures, underwriting, etc.
Most importantly, investment banks being ‘banks’, they also provide loans or money. In many cases, they direct and help provide access to other sources of money.
Investment banks also offer advice and services to corporates and governments on risks like economic changes, volatile stock market, rupee movements, price fluctuations or even political instability. The expert guidance on risk management helps much in running businesses and countries.
Another service offered by investment banks is much needed – information. By research, collection and analysis of data and trends, investment banks help corporates and governments in making crucial decisions

6) Who regulates investment banks?

The Reserve Bank of India (RBI) regulates investment banks. However, it is the Securities and Exchange Board of India (SEBI) that governs the financial part of investment banking in India.

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