Primary Business Functions of a Major Investment Bank - Coursework Example

Describe the Primary Business Functions of a Major Investment Bank Such As Credit Suisse, Goldman Sachs, Bank of America Merrill Lynch, Or Morgan Stanley Investment banks are comprehensive financial institutions that are involved in private and public market transactions for investors, governments and corporations. Strategic advisory services are offered by investment banks. Transactions done by investment banks are acquisitions, mergers, divestitures, and underwriting of securities. Examples of investment banks include Merrill lynch, Goldman Sachs, Morgan Stanley and Credit Suisse. Investment banks differ from brokerages and commercial banks (Essvale Corporation Limited 2). The initial function of investment banks was to advise on acquisitions and mergers, raise capital and offer advice on corporate financial strategies. The modern investment banks have diversified their roles into: (a) syndicating, distributing and underwriting new security issues, (b) brokerage services – providing brokerage services to institutional and public investors, (c) offering financial advice to corporate clients especially on matters pertaining to M&A deals and security issues, (d) research activities – offering financial security research to corporate customers and investors, and (e) market making specifically in securities (Essvale Corporation Limited 3). Raising Capital Investment banks assist companies in raising capital by arranging issuing of new securities in the capital markets. Two methods are used to perform the function; through private placement or public offering. Securities can be sold to a wide range of investors through public offering. The investment bank sells the company’s stock in the initial public offer or in the secondary offer or through a bond issue. The sale of the securities is strongly regulated by Financial Services Authority. Securities can be offered to a small group of sophisticated investors through private placement. Private placement has a few rules that the investors have to comply with. Other types of investments with the exception of securities are distributed through a private placement. These investments include acquisitions, private equity, venture capital, and other strategic investments by the company (Essvale Corporation Limited 3). Issuing of Securities Investment bankers perform the following functions when issuing securities; (a) advise the issuer on the time of offering and the terms of the security, (b) buy the securities from the issuer, and (c) distribute the issue to the public. It is not necessary for the investment banker to buy the security from the issuer; the investment banker can act as a distributor or the advisor of the new security (Fabozzi and Peterson 61). Underwriting is the process of buying securities from the issuer by the investment banker. Underwriter is when the investment bank buys issuer’s securities and acknowledges the risk of selling the securities to the investors at a low price. Firm commitment is referred to as the underwriting agreement; it is when the investment bank accepts to buy the securities at a set price from the issuer (Fabozzi and Peterson 62). To avoid the risks associated with underwriting transactions, the investment bank shares the risks by forming an association of firms in underwriting the issue. In most cases, there is more than one underwriter. A strong sales force is vital for a successful underwriting of a security (Fabozzi and Peterson 62). Research Activities Research and analysis id done on selected company equity securities and debt, commodities, industries and economies. The research groups provide trading and investment recommendations, strategies for individual and institutional investors, and Trading Division of the company. Apart from writing reports and conducting research, the research professionals make interactions with the issuing and investing clients, and host meetings and conferences between the investors and government or corporate issuers (Stowell 180). Research themes are developed by research professionals who develop analytical models that assist them in capturing relevant information and interpret events. Writing skills are essential for the research professionals to facilitate effective communication (Stowell 180). Financial Advice to Corporate Clients Investment banks offer advice to governmental organizations and firms that need to raise funds in securities market; to corporations that purpose to acquire another company’s securities in order to control the company; and to companies that need to revise their negotiations with the security holders and to do restructuring of the liability structure with the aim of avoiding bankruptcy (Morrison and Wilhelm 21). Advice work concerning restructuring services, and mergers and acquisitions is a well compensated activity. It is a recent addition in the investment banking field. The initial work of the investment banks did not involve pure advisory functions as a line of business. The advice was given but not directly with fees (Morrison and Wilhelm 255). Proprietary Trading Proprietary trading occurs when the bank trades in bonds, stocks, commodities, options or any other items with their own money other than the customer’s money. The aim is usually for the bank to make profits for themselves. The proprietary trading desks are composed of groups of managers who manage proprietary book banks using the same financial instrument and technique like that used in hedge funds. The managers in the proprietary trading desks are employees of the investment banks (Stefanini 4). Brokerage Services These services involve the trading and execution of orders on behalf of investor. The services also offer liquidity to the business market. Brokerage services help in the sale and purchase of bonds, mutual funds and stocks (MBA Knowledge Base). Investment Research Technology Goldman Sachs utilizes a number of technological tools. Investment research technology group is involved in the creation of reports on companies and industries, macroeconomic forecasts, strategic portfolio management recommendations, and investment suggestions on individual securities. The projects done by the investment research technology group include; (a) the development of analytical tools used for sophisticated stock screening and financial modelling, (b) generation of custom document management solution to form, publish and store the company’s research data, (c) build web site for the clients that features the tools that can be used by the company to work with the data produced by the Global Investment Research analysts, (d) development and maintenance of distribution systems for the transmitting of research work to clients in the firm and outside the firm, and (e) creation of reporting systems for ensuring regulatory compliance, and monitoring and improvement of client service. The following groups are in the investment research technology; (a) Publishing designs and development of analyst facing creating tools and workflow. They include the use of Word and PowerPoint templates in the formation of written content and production of renditions from the same content. (b) Numbers is involved in the delivery of centralized global strategy for the processing and capturing of Investment Research financial data. Financial analysis tools are also integrated into the analyst desktop through .NET and also through the core J2EE workflow systems. GS SecDB platform is also leveraged because it has benefits on the Global Investment Research (GIR) and the circulation of the numbers firmwide. (c) Content Management Group Applications – they offer software solutions for centralization, streamlining and expedition of content management tasks. The applications are used for referential data workflow management, document, generation and compendium authoring. (d) Distribution is involved in the re-engineering of the GIR distribution platform. New technologies on the internet are leveraged in order to increase the presence, marketability, and visibility of GIR; such technologies include the RSS channels and podcasts. (e) Management Information Systems – they provide operational reports and analytical tools for the GIR management and their business unit leaders. (f) Core – it is concerned with the overseeing data architecture, quality assurance, software development, software deployment procedures, project management, and division-wide technical concerns like performance, security and scalability. (g) Legal – software tools are developed for generating disclaimers and disclosures. These are meant to meet the requirements in the regulation of investment research publications (Goldman Sachs). The investment research technology is faced with problems such as the high costs that are incurred. The firms are required to generate their own revenues to cover the research costs (Wyatt 82). Works Cited “Principle Functions of Investment Banks.” MBA Knowledge Base. MBA Knowledge Base, 2011. Web. 28 Jan. 2011. “Technology.” Goldman Sachs. Goldman Sachs, n.d. Web. 29 Jan. 2011. Essvale Corporation Limited. Business Knowledge for IT in Investment Banking. London, UK: Essvale Corporation Limited, 2006. Print. Fabozzi, F. J. & Peterson, P. P. Financial Management and Analysis. Hoboken, NJ: John Wiley & Sons, 2003. Print. Morrison, A. & Wilhelm, W. J. Investment Banking: Institutions, Politics, and Law, Volume 10. Oxford, UK: Oxford University Press, 2007. Print. Stowell, D. An Introduction to Investment Banks, Hedge Funds, and Private Equity: The New Paradigm. Burlington, MA: Academic Press, 2010. Print. Wyatt, Ian. The small-cap investor: secrets to winning big with small-cap stocks. Hoboken, NJ: John Wiley & Sons, 2009. Print. Read More