While huge company mergers, initial public offerings, and other big business transactions may make the headlines, most of them never could have happened with out thehard work and long hours of a solid investment bank behind them. When the law requiring the separation of commercial (what we traditionally call a “bank” from where you deposit and withdraw money) andinvestment banks (that work with companies and governments to raise and invest money) was repealed in 1999, it caused tremendous upheaval in the industry. Since shortly after the stock market crash ofthe 1920s, commercial banks and investment banks had needed to be separate companies, but today most financial institutions have their fingers in both pies.
Investment banks are experts at calculatingwhat a business is worth, usually for one of two purposes: to price a securities offering or to set the value of a merger or acquisition. Securities include stocks and bonds, and a stock offering maybe an initial public offering (IPO) or any subsequent (or “secondary”) offering. In both cases, I-banks charge hefty fees for providing this valuation service, along with other kinds of financialand business advice.
When banks underwrite stock or bond issues, they ensure that institutional investors, such as mutual funds or pension funds, commit to purchasing the issue of stocks or bondsbefore it actually hits the market. In this sense, I-banks are intermediaries between the issuers of securities and the investing public. I-banks make markets to facilitate securities trading by buying andselling securities out of their own account and profiting from the spread between the bid and the ask price. In addition, many I-banks offer retail brokerage and asset management services. Retailbrokerage services deal directly with the customers, allowing individuals and small organizations to purchase stocks, bonds and other financial service products directly. Asset management services...