Investment banks play important roles in the financial system by facilitating capital raising and providing advisory services. Some key functions performed by investment banks include underwriting securities offerings, advising on mergers and acquisitions, facilitating trading and market making, and providing research. By underwriting securities like stocks and bonds, investment banks help companies raise funds from investors. They also advise buyers and sellers on M&A deals. Their trading desks facilitate client trades and provide liquidity by acting as market makers. Research analysts at investment banks produce reports and recommendations to guide investor decisions.
Underwriting to raise capital for clients
One of the most important functions of investment banks is underwriting securities offerings to help raise capital for corporate clients. When a company wants to issue stocks or bonds to investors, the investment bank will guarantee to purchase the securities from the company at an agreed price and resell them to investors. This helps provide assurance to the issuer while also introducing securities into the capital markets.
Advising on M&A transactions
Investment banks have teams of M&A specialists to advise buyers and sellers on mergers and acquisitions. They provide valuation analysis, deal structuring advice, transaction execution assistance and help negotiate key terms. By facilitating these corporate deals, investment banks play a key role in shaping industries.
Market making and trading services
Many investment banks operate trading desks that facilitate client trades in stocks, bonds and other securities. Their traders may also serve as market makers providing liquidity by being ready to buy or sell securities on their own account. Investment banks generate significant trading revenues from spreads and market making.
Equity research and recommendations
Investment research teams at investment banks analyze information related to industries, sectors, companies and securities. Analysts produce research reports, financial models, earnings estimates and stock recommendations that are widely used by investor clients. Their calls can move stock prices on announcement.
In summary, by underwriting securities, advising on M&A deals, facilitating trading activity and providing equity research, investment banks perform various critical functions in capital markets and the broader financial system.