Investment Banks$


Investment banks help companies and governments raise money by issuing and selling securities in the capital markets (both equity and debt), as well as providing advice on transactions such as mergers and acquisitions. Until the late 1980's, the United States and Canada maintained a separation between investment banking and commercial banks.A majority of investment banks also offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities.Trading securities for cash or securities (i.e., facilitating transactions, market-making), or the promotion of securities (i.e., underwriting, research, etc.) is referred to as the "sell side".The "buy side" constitutes the pension funds, mutual funds, hedge funds, and the investing public who consume the products and services of the sell-side in order to maximize their return on investment. Many firms have both buy and sell side components. Organizational structure of an investment bank: The main activities and units:The primary function of an investment bank is buying and selling products both on behalf of the bank's clients and also for the bank itself. Banks undertake risk through proprietary trading, done by a special set of traders who do not interface with clients and through Principal Risk, risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet.An investment bank is split into the so-called Front Office, Middle Office and Back Office.Front OfficeInvestment Banking is the traditional aspect of investment banks which involves helping customers raise funds in the Capital Markets and advising on mergers and acquisitions. Investment banking may involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Other terms for the Investment Banking Division include Mergers & Acquisitions (M&A) and Corporate Finance. The Investment Banking Division (commonly referred to as IBD) is generally divided into industry coverage and product coverage groups. Industry coverage groups focus on a specific industry such as Healthcare or Technology, and maintain relationships with corporations within the industry to bring in business for the bank. Product coverage groups focus on financial products, such as Mergers & Acquisitions, Financial Sponsors, and Leveraged Finance. Investment management is the professional management of various securities (shares, bonds, etc.) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes eg. mutual funds). The Investment management division of an investment banking is generally divided into separate groups, often known as Private Wealth Management and Private Client Services. Private Wealth Management deals with institutional investors, while Private Client Services manages the funds of high net-worth individuals. Sales and Trading is often the most profitable area of an investment bank, responsible for the majority of revenue generated by most investment banks. In the process of market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on caveat emptor basis) and take orders. Sales desks then communicate their clients' orders to the appropriate trading desks, who can price and execute trades, or structure new products that fit a specific need. Structuring has been a relatively recent division as derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities. The necessity for numerical ability has created jobs for physics and math Ph.D.'s who act as quants. Merchant banking is a private equity activity of investment banks. Examples include Goldman Sachs Capital Partners, JPMorgan Partners, etc. Sometimes, merchant banking is a part of Alternative Investment division. Research is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. While the research division generates no revenue, its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. There is a potential conflict of interest between the investment bank and its analysis in that published analysis can affect the profits of the bank. Therefore in recent years the relationship between investment banking and research has become highly regulated requiring a Chinese wall between public and private functions. Strategy is the division which advises external as well as internal clients on the strategies that can be adopted in various markets.