What is Investment Banking ? IPO, Examples, Services , levels and More 2024 Edition

Last updated on August 23rd, 2024 at 12:26 am

What is Investment Banking ?

Investment Banking is a part of financial services which offers advice and support to huge giants like companies, governments, and large investors. It focusses on raising money for their clients by issuing stocks or bonds and assists them with important terms like mergers (when two companies becomes one) and acquisitions (when one company buys another).

There is a huge difference between Investment banks and regular banks (like those where you have a savings account) because investment banks do not accept deposits from customers. They charge their clients for the services they are providing.

Services Offered by Investment Banks such as :

• Helping Clients to help and understand new stocks or bonds to raise money.

• Advising and assisting companies when to merge with other companies or buy another company.

• Advertising and buying financial products like stocks and bonds to help maintain a liquid (how fast a thing can be sell ) market.

• Analyse Data and provide reports on various financial markets, industries, companies and all over market environment.

• Offering services like managing investments and providing advanced financial products.

The industry can be categories into 3 levels :

• Bulge Bracket: Most prestigious and largest investment banks.

• Middle Market: Mid-sized investment banks.

• Boutique Market: Smaller, specialized investment banks that focus on specific areas or industries.

What is Initial Public Offering (IPO) in investment banking ?

The investment banking comes under finance services , mainly works with buying and selling stock of public companies. So when a company wants to sell its stocks or shares to the public for the first time (an IPO), it often works with an investment bank to make the process smoother.

• The Investment bank acts between the company and investors. Try to set the right price for the company’s stocks according to market environment and ensure all legal requirements are met.
• The investment bank first itself buys a large number of shares from the company. This means the company do not need to hustle they gets money directly from selling these shares to the bank.
• The investment bank then sells these shares to the public. They aim to sell the shares at a higher price than what they paid to make a profit.
• Simplifying for the Company: By handling the IPO, the investment bank starts the hard part of selling the shares. This makes things easier for the company because the bank deals with the market and investors directly.

Potential for Profit and Risk:

• Profit: If the investment bank sells the shares at a higher price than it bought them, it makes a profit.
• Risk: There’s a risk involved. If the bank has set the price too high and can’t sell the shares at that price, it may have to lower the price, which can lead to a loss depends on the price set on the shares.

In short, investment banks help companies go public by buying their shares and selling them to the public, aiming to make a profit but also taking on some risk.

Here is an Example to better understand what is Investment Banking :

Let us consider a tech startup, named as “ TechSavvy Innovations “, which wants to go public. The company approach to an investment banker named Lisa at a large investment bank. They agree on terms that Lisa’s firm will buy 50,000 shares of TechSavvy at $15 per share to help with the company’s Initial Public Offering (IPO).

Here’s the breakdown of process or chain of events step by step :

Initial Agreement Deal: Lisa’s bank agrees to buy 50,000 shares at $15 each, which results total grand sum of $750,000.

Bank Start Selling Share: The bank first make the shares the “Public” and then starts selling shares at $18 each

Sales Outcome:

• Bank successfully sell 30,000 shares at $18 each.
• Bank face difficulty selling the remaining shares at this price and lower the price to $14 per share for the remaining 20,000 shares.

At the end of the process, the investment bank’s results are:

Money is categories as :

• From Sales: $860,000
• From the 30,000 shares at $18 each: $540,000
• From the 20,000 shares at $14 each: $280,000
• Total Money Made: $860,000
• Initial Cost: $750,000

Net Profit: $110,000 (because they initially paid $750,000 for the shares but made $860,000 from selling them)

Investment banks compete to get IPO deals, and if they are willing to pay more to secure a deal, they might risk either gaining or losing money based on how well the shares perform.