What is Investment Banking?

//What is Investment Banking?
What is Investment Banking? 2017-10-27T02:13:17+00:00

Definition: Investment banking indicates a special section of banking that offers financial advice to institutional investors, seeking to assist them with raising capital.

What Does Investment Banking Mean?

What is the definition of investment banking? Investment banking is a separate section of banking that deals with capital creation for institutional investors, including large corporations and governments. Large investment banks such as Citigroup, Goldman Sachs or Morgan Stanley, to name a few, offer a wide range of financial services pertaining to mergers and acquisitions, debt restructuring, proprietary trading, leveraged finance, and so on. In addition, investment banks maintain a large share of the underwriting of initial public offerings (IPOs) and new debt as well as in the placement of new stocks.

Let’s look at an example.

Example

Anthony is an investment banker, working at Bank of America Merrill Lynch, one of the bulge bracket banks. He is assigned with the merger of two large retailers, both leaders in the industry, and Anthony should employ a leveraged buyout (LBO) model to calculate the actual value of the target company as well as the long-term benefits for his client, the acquirer company.

As an investment banker, Anthony should perform due diligence to determine the value of target company based on own calculations derived from the company’s valuation data. Then, provided that the deal is for his client’s best interest, Anthony will settle the deal by helping his client to prepare all the necessary documentation pertaining to a merger and acquisition. Furthermore, he will offer his advice on the most appropriate timing to close the deal, considering the market reaction, the investor confidence, the market trends and other related factors.

Provided that the deal closes successfully, Anthony will gain a high commission for his advisory services, which will be only a percentage of the higher commission that the investment bank will receive. Obviously, the bigger the deal, the higher the commission.

Summary Definition

Define Investment Banking: IB means financial and investment services designed for businesses and corporate clients.