The Essential Role of Investment Banks in the Financial Industry

I have written previously about why one should get interested in investment banking. More people would like to know more about the roles investment banks play in the financial industry. In this article, you get to understand investment banks' four specific roles. It should be easier to understand for a finance professional or someone who needs some knowledge.

It is hard to understand what such consultancy offers and why it is highly priced in all online sources. Some argue that it is because of the highly secretive nature of the business. Secretive not only about their business models but also about client data. The employees that also leave are bound by several non-disclosure agreements. Worry not. We pass through some of the roles that investment banking does in finance.

Capital Raising and Underwriting

Underwriting is the practice of determining the actual value of an asset by determining its risk and price. Investment banks help investors as underwriters in Initial public offerings (IPOs) and debt issuance. It is only achievable due to their leverage on networks to price and distribute securities in the market. The funds raised are available for companies to expand, do research and development and other strategic initiatives.

It is essential to understand that Investors have a prior agreement with an investment manager in a bank on what type of assets they are interested in. Such documentation is called an Investment policy statement. This makes an investment bank a full link because they do not only serve the investors but also the issuer of the asset.

Mergers, Acquisitions, and Divestitures

Investment banks are critical players in Mergers and acquisitions, apart from legal entities, which tend to dominate such spaces. The role of these banks ranges from strategic advice, financial analysis and deal structuring. The value addition in such a portfolio is that the banks conduct thorough due diligence, value the businesses, identify potential customers and give capital allocation strategies.

Advisory Services

All the big four entities in the financial industry must have an advisory arm of the business. It is not any different from investment banking as a service to both the issuer and the investor. Their advisory service ranges from devising capital strategies, managing risks and navigating regulatory challenges. Moreover, due to having existed for a long time, they offer helpful insights on industry trends, market conditions and investor sentiment to enable you to make strategic, informed decisions.

Market Making and Trading

Market-making involves providing liquidity and facilitating the trade of securities. Investment banks achieve this as institutional traders buy and sell derivatives and other financial instruments. All these duties are conducted on behalf of their clients. Due to high trade volumes, they help ensure effective pricing, market efficiency and liquidity for both day and swing traders in the financial markets.

Conclusion: The Essential Role of Investment Banks in the Financial Industry

Investment banks are indispensable due to the roles they play. That is not limited to the ones mentioned in this article, from facilitating efficient capital markets and fostering economic growth to driving innovation. Their role as advisors is significant to raise capital by leveraging expertise and deep industry knowledge. 

Such is needed for the stability and development of the global financial industry. Investment banks are shaping and will continue to shape the future of finance through corporations, governments and investors worldwide. As long as companies need money and others have it stored somewhere, the need for an intermediary will always be available. Of course, with some value addition due to having several competitors in the market.