Capital Markets and Investment Banking

Capital Markets and Investment Banking

Fin 402: Investment Fundamentals and Portfolio Management

A thriving capital market is essential for an economy’s growth and financial stability. The capital market matches borrowers and investors, and investment banks serve a vital role in this process. As constant participators in the market, investment banks are particularly qualified to assist firms in bringing their securities to market. They have valuable insight into market conditions that can help a company set the appropriate price for the issue, as well as time the issue to better increase the probability of a successful offering.

Investment banks are most active in the primary market, that is, in the brining of an initial public offering (IPO) to the marketplace. It is in this role that investment banks assist public and private organizations in raising funds. Investment banks act as an intermediary between the investing public and the issuer of a security. Corporations that issue securities often seek the services of an investment bank. The services offered by an investment bank include underwriting as well as advisory services related to mergers, acquisitions, and other financial transactions. When an investment bank agrees to underwrite an IPO, they have agreed to purchase all of the shares of the IPO at a fixed price that is discounted from what will be the public price. Therefore, the underwriter (and not the issuer) assumes the risk of the IPO, as they will be left holding any unsold shares. It is also in the selling of this discounted stock to the public where the underwriter makes most of its profit from the IPO.

Investment banking is countered on the other side of the capital market by the individual and institutional investors looking to make profits through the purchase of securities. These investors add these securities, as well as other financial instruments, to their portfolio as part of an asset allocation plan to match their...