What is an Investment Bank?
What is an investment bank – Chardan for example? How is it different from a regular bank where people deposit and borrow money? Investment banks are a special kind of financial institution primarily working in high finance. They assist firms access capital markets – the bond and stock market – to raise funds for business expansion or other requirements. For instance, if a multinational company wants to sell bonds worth several millions to erect new plants in a region, an investment bank will invariably assist the company locate buyers for its bonds and manage the documentation part, along with a group of accountants and lawyers.
Buying and Selling
Often, investment banks could be found divided as two camps: buy side and sell side. Investment banks usually offer both sell side and buy side services. The buy side focuses on mutual funds, pension funds, hedge funds, etc. It works with investors to help them boost their returns when investing in or trading securities such as bonds and stocks. The sell side, on the other hand, deals with selling stocks of freshly issues IPOs, placing fresh bond issues, helping clients carry out their transactions, and indulging in market-making.
Three Primary Offices
Several investment banks are categorized to deal with the back, middle, or front office services.
Front Office
Front office services usually comprise investment banking services, such as helping firms with acquisitions and mergers; corporate finance or issuing commercial papers worth several billion dollars to assist with the funding of routine business operations; professional investment management of high net worth people or institutions; merchant banking; preparation of capital market and investment research reports; and strategy formulation that includes various parameters such as risk limits and asset allocation.
Middle Office
Middle office services entail compliance with state regulations and setting limitations for professional clients, including banks, finance divisions, and insurance companies. This at times comes under the purview of a back office. Also, it includes capital flows. The middle office keeps a watch on the money that goes out and comes in to the firm to ascertain the level of liquidity the firm requires to maintain so that it does not enter financial distress. The team that manages capital flows could use that data to limit trades by decreasing the trading/buying power offered to other divisions.
Back Office
Back office investment banking services include handling trade confirmations; making sure the right securities are purchased and sold; the technology platforms and software that let traders function are functional and up-to-date; and the creation of fresh trading algorithms. Back office jobs usually are viewed as non-glamorous, which is why some investment banks may outsource back office work to third-party companies such as custodial firms. Nevertheless, a back office lets the entire thing to function. Without it, a lot of things won’t be possible.
Activities
Investment banks would typically engage in all or some of the following:• Raise equity capital • Raise debt capital• Launch new products or insure bonds• Indulge in proprietary trading
Working Hours
Investment bankers get paid handsomely because they work hard, for long. Investment managers are expected to work as per their client’s requests and schedule. Moreover, as most of the work is stock market-based, an investment banker’s actual work usually begins after the markets shut down.Investment banking is specialized work. Therefore, a single individual could be often seen taking up responsibility for major tasks so that there is no element of error or confusion. This ultimately results in long business hours for investment bankers. This doesn’t imply that an investment banker doesn’t work within a team. They do; however, their roles and responsibilities are clearly distinguished and well-defined.
