Click Here - Investment banking products and services

Investment banking products & services

1. Equity & debts capital market (ECM & DCM)
2. Advisory
3. Trading & brokerage
4. Asset management  

1. Capital market - > company utilizes this service to meet their financial obligations so they go public through ECM & DCM.

 

ECM – EQUITY CAPITAL MARKET

 IPO – Company which intends to expand its business operation and looking for additional fund to that, will go for selling its shares to the general public in the form initial public offering.

Firms shares is sold to multiple investors resulting in losing most of the ownership.

Where BOD has the right to elect the CEO of the firms since the majority shares lays in BOD hands. And there is lot of risk factor and legal factors to be considered before going to list the IPO. So here comes the INVESTMENT BANKER who plays a key role in advising the firm.

1. When to go public
2. How to attract the investor
3. Conduct meetings b/w company management & investors
4. Book building that’s pricing the IPO
5. Price stabilization

 Types of IPO

1. Retail investors -> private individuals, who bid in the IPO listing to get the shares with less income with minimum returns.
2. Institutional investors ->specialized investors with more knowledge such as Mutual funds, pension funds and insurance companies. Who invest very high to gain more returns.
3. Hedge funds – who looking to profit from underpriced or overpriced securities to make profit from investment.

 

	RETAIL	INSTITUTIONAL	HEDGEFUNDS
INVESTMENT PERIOD	LONG	LONG	SHORT
RETURN	AVG	AVG	HIGH
RISK	LOW	LOW	HIGH

 

Type of Investor preferred by investment banking firms.

1. Retail investors -> who hold the stock for long so IB prefer retail investors
2. Institutional investors -> who hold the stock for long so IB prefer retail investors.
3. Hedge funds -> likely to sell the shares after IPO, so hedge funds investor are not preferred. 

“Book building is how INVESTMENT BANKERS determine the IPO share price. They collect bids from institutional investors, to establish the optimal price. However, this process carries the risk of setting the price too high or too low, impacting investor interest and market perception”

        IPO allocation

1. Timing of IPO application submitted
2. Qty of shares quoted
3. Previous IPO track record.

IPO fees distribution

1. Underwriting fee – 20%
2. Management fee – 20%
3. Selling fee – 60%

Seasoned Equity offering - Existing company going for additional IPO, less prep work, pricing & admin prep done. One the investors is sorted out; the investment banking firms undergo the under writing of the shares to sell for the investor.

Stock exchanges – 2^nd market where listed shares or bonds traded on market, it has good transparency, liquidity and maintains all the compliance.

 

DCM – DEBTS CAPITAL MARKET

BOND offering is similar to ECM also, borrowing the money and paying the interest against the premium throughout the bond period.

1. To meet short term requirement
2. Easier to price the bond by credit rating agencies
3. Ease of finding investor since the return is guaranteed

Syndicated loans – loan provided by pooling from different banks where investment banking plays the middleman between the investors and borrower with same terms and condition with one agreement.

1. Reasons to issue syndicated loans
2. Diversification
3. Fee generation
4. Globalization

 Types of bonds in investment banking firm

1. Fixed rate bond 
2. Floating rate bond
3. Equity related bonds – debt security, which is convertible into equity
4. Asset backed securities-is collateralized by an underlying pool of assets—usually ones that generate a cash flow from debt, such as loans, leases, credit card balances.

Why issue bonds?

1. Bonds interest rate is lower when compared to bank business loan.
2. Less restrictions
3. Bonds is not for short working capital
4. Easier to price the bond then equity.
5. Since credit rating agencies rate the bond valuation.
6. Bond listing only takes 25-35 days.

Bond process  

Hire advisor -> assemble syndicate banks-> hire credit rating agencies -> contact investors -> book building -> underwrite and sell -> stabilization periodVast investors. 

2. Advisory – M&A and restructuring

M&A deals are the most profitable business which earns massive commission and fees can be charged for the advisory services rendered by the investment bankers.

 

1.     Parties involved
2.     Buyer company
3.     Target company

 Why the company need to acquire or merge the business ?

-         Acquiring the Existing business is much cheaper than est the new business

-         Entering into new market as new company is far better than merging with existing company to mitigate the potential risk.

 “Investment banker act has advisory services for the firm looking for M&A deals, since they have lot of connection when compared to the company owned advisory”

 

Buy-side IB Strategic advice Target valuation (pricing for buying) Synergy estimation (success rate)

Sell-side IB Finds bidder Sales process PREP Business valuation Minimum bidding price Co-ordinates sales process Work with advisors and bidders

 “Crucial factor involving the Investment banker in M&A deals to determine the “PRICING” strategy”

 

Restructuring advisory – Investment banker provide the restructuring advisory or recovery business plan in case of the firm is being distressed to pay of his debts or bankrupt.

Operating difficulties

Financial issues- interest may be high

 “investment banker negotiates with lenders to increase the liquidity position of the firm to regain the business operation”

 

 3.  Trading and brokerage

Trading - Investment bank makes money by purchasing stock of the particular companies and when it appreciates / depreciate, they make money or loss money similar the investor in the stock exchange investment banking firm also do the trading activity.

 

Brokerage -> it’s the fees charged by the broker or middlemen for trading the stock by using their platform.

 brokerage markup - The difference between the market price of a security personally held by a broker-dealer and the price paid by a customer

 “Price paid by investor – price of the security acquires = brokerage markup”

 ***1/3^rd of the revenue is gained by trading and brokerage fees for the investment banking firm”

Proprietary trading - occurs when a financial institution trades financial instruments using its own money rather than client funds.

1.     Research dept provide the accurate stock investment advice.
2.     Market pulse is predicted for investment
3.     Market advantage

Market making – investment banker player a crucial role in boosting the sales of the illiquid securities. They buy the shares and sell it to the investor when its placed for buy orders the difference b/w the buy order and sell order is what the profit it earns also known as bid-ask spread.

4. Asset management companies- investment bankers manages the money on behalf of the institutions to build and increase the wealth over time.

“HNWI (high net worth individual) or organization approach the asset management companies to increase their wealth”

The AMC invest the funds in more diversified funds to overlap or mitigate the risk factor over the period on the investment made.

AMC services

1. Understand the requirement of investment
2. Investment strategy
3. Plan implementation
4. Monitoring

Roles of AMCs in investment banking firms or the job profile

1.  Sales – Est client relationship by understanding the needs Portfolio managers.
2.  To make investment decisions based on the needs of investors
3. Research department - investment insights.

Click here - Difference between commercial and investment banking

 Why can’t regular bank provide the investment banking services?

è Commercial Banks They are mainly involved in taking deposits and provide loan to general population.

è Commercial Banks Collect deposit from public and give credit to the general public who in need of money for their personal gain.

But the difference between the deposit taking and credit giving is the interest charged for both the products, where the depositor gets less interest i.e. is 6% on his money deposited in and credit borrower might be charged more than 6% as per the amount loaned.

 “Interest income – interest expense = spread”

Spread – a primary sources of renew to the banks

 “So, the process is entirely different from the investment banker to commercial banker” 

 

Difference between Investment v/s Commercial banking
Basis	Investment Banking	Commercial Banking
Operations	Advice M&A deals Underwriting services Trading operation & Research	Maintaining the savings accounts of individuals and business Lending money as loan Credit card services
Deposits	They don’t accept deposits, they provide advisory services and charge fees or commission.	Accepts Deposits
Target market	HNI’s, large corporate houses and government etc.	General public. Business enterprises
Income	Margin business	Volume business
Regulation	Security agency	Central bank

What is universal bank?

Universal bank – In simple terms which provides both the services of Commercial and Investment banking firms.

  

ØAdvantages

One-stop-shop to access various financial services, such as investment banking, commercial banking, insurance and other financial services.

 Universal bank provides various financial services making it to reduce the operational cost.

They utilize their resources more efficiently since it provides all kind of financial services.

Customer loyalty and trust worthy can be gained.

 Ø Disadvantage

Since the bank knows in depth financial position of the company and if the company is facing any liquidity issue., it might try to cover it loss by raising a bond to investor and investor might buy it without much consideration despite the company is running under financial loss.

So here, the bank is recovering its loss and company is losing it goodwill among the investor.

1933 – Glass-Steagall act -> to overcome this barrier the universal banking operation was stopped i.e. to separate the commercial and investment bank since it was building the credit or debts.

1999 – Gramm leach Bliley – universal banking concept was re-initiated so that commercial banks can offer investment banking services.

This led to formation of Global financial conglomerates:

1. HSBC
2. J.P. MORGAN
3. BOA
4. DB
5. BNP PARIBAS
6. WELLS FARGO
7. MUFG
8. CITI

Pure investment banks

1. Goldman Sachs
2. Morgan Stanley   

Click here - History of Investment Banking

 

Investment Banking

Before diving into history of investment banking lets understand who are investment banker and what is there role in finance world.

Investment banking

 “Investment banking emerged mainly to act as a middleman between the investor and borrower to fulfil their financial obligations”

“IB survived has a bridge between the investor and borrower (govt, private sector. Etc) to meet the demands and it consisted of only security underwriting @ initial days”

Reason for Investment banker to act has middle was mainly due to the borrower didn’t have the clear analysis about the pricing and market to sells its products to investor and wise versa for the investor also they couldn’t able to find the reputed business for investment who can assure returns.

 

Below scenario for better understanding of how investment banking works.

Investment banking firm is negotiating a deal with the borrowers i.e. govt for the products details such as pricing, tenure and volume.

Once the negotiation is successful the investment banking firm meets the investors, finds the Potential interested investor for the particular products and sells the products.

Note - when buying the govt bonds there are 2 main issues,

• Govt may default the debt pay
• Renegotiate the bonds

“So, to overcome the issues the investment banker firm can help to mitigate the risk factor involved, which boosted the reputation of investment banking firms over a year”

History of investment banking

Investment banking has a rich and complex history that spans several centuries. Here are some key milestones.

Early Origins: Investment banking can trace its roots back to medieval times when merchants began trading commodities like spices, silk, and metals. These trade eventually evolved into merchant banks, providing financial services such as underwriting and issuing government bonds.

 

Bank Developments: The 19th century saw the rise of prominent banking families like the Rothschilds, Barings, and Browns. These banks began to take on more modern forms, engaging in activities such as underwriting and selling government bonds.

Expansion in the U.S.: in 90’s centuries Investment banking gained significant development in the United States during the Civil War, as banking houses were syndicated to meet the federal government’s financial needs. This period also saw the establishment of some of the most famous investment banks, such as JP Morgan and Goldman Sachs.

The Glass-Steagall: The market crash of 1929 and decline in market economy were challenging times for investment banks. Many were forced to merge to survive, and the industry faced increased regulation, including the Glass-Steagall Act of 1933, which separated commercial banking from investment banking.

Modern Era: The late 20th and early 21st centuries saw waves of deregulation, followed by new regulations after the financial crisis of 2007-2008. Investment banks today continue to play a crucial role in global finance, offering a wide range of services from underwriting to advisory roles in M&A.

 

Click here - One must pursue an NISM certificate to add value to their career growth

 

Certification courses for finance field graduates and professional

Additional certification courses approved by SEBI for finance field graduates and who is looking for career growth in investment banking field and stock brokerage firm, must do the below courses and will be add on value to your resume.

This certification will land you in a good job with high pay in fortune companies. The exam is conducted by NISM – National institute of securities markets and there is not age limit or any qualification is required, anyone who is aspiring to learn more about stock market can take the courses.

The below certification is self-learnt, so there is no need of any investment for tutorial class and we just need to pay for examination fees which might varies from 1500 – 3000 Rs. As per the NISM series with free study material.

Click on the below link to create an NISM account and also must have the PAN card number.

https://certifications.nism.ac.in/NISMAOL/homeplatform.htm

To download the study material please click on the below link.

https://api.nism.ac.in/cmp/Share.aspx

Below are some NISM exam for in an order.

NO.	NISM SERIES EXAM
1	NISM-Series-XII: Securities Markets Foundation Certification Examination English
2	NISM-Series-V-A: Mutual Fund Distributors Certification Examination English
3	NISM-Series-V-B: Mutual Fund Distributors Certification Examination English
4	NISM-Series-XXII: Fixed Income Securities Certification Examination English
5	NISM-Series-XV: Research Analyst Certification Examination. English
6	NISM-Series-VIII: Equity Derivatives Certification Examination English
7	NISM Series I: Currency Derivatives Certification Examination English
8	NISM-Series-IV: Interest Rate Derivatives Certification Examination English
9	NISM-Series-XVI: Commodity Derivatives Certification Examination English
10	NISM-Series-VI: Depository Operations Certification Examination English
11	NISM-Series-X-A: Investment Adviser (Level 1 ) Certification Examination English
12	NISM-Series-X-B: Investment Adviser (Level 2) Certification Examination English
13	NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors Certification Examination English
14	NISM-Series-XXI-B: Portfolio Managers Certification Examination English