An investment bank is different from a commercial bank. This type of bank is concerned with higher finance. Thus, an investment bank helps the companies earn profits and thereby assists them in their growth.
What does a typical investment bank do?
- A typical investment bank helps in generating revenues by raising equity capital.
- The bank raises the debt capital by giving out bonds and other financial instruments.
- The investment bank launches new products and insures bonds.
- Proprietary trading is another activity of the bank. In proprietary trading, a bank buys stocks, bonds or other financial instruments with its own money rather than that of its customers. This purchasing is done in order to make more profit. For example if the bank thinks that the gold prices are going to rise, it purchases gold in order to make more profit in the future.
The activities of the investment banks are perceived to be more risky as compared to those of the conventional banks. Therefore, till a decade ago the investment banks were not a part of the commercial banks. However, the scenario has changed now.
What are the different types of investment banks?
The investment banks are categorized according to the buy side and the sell side. However, many investment banks provide both the services.
The sell side deals with new bonds, trading of shares or assisting the customers in making transactions.
The buy side works with the different type of funds like mutual funds, pension funds etc. The purpose is to help the clients in getting maximum returns from their investments.
Another categorization of the investment banks is done on the basis of whether they deal with front office, middle office or back office services.
The front office services comprise typical investment banking. The bank assists the companies in making purchases. Also, the front office services consist of corporate finance and merchant banking. In corporate finance the banks give money to the companies so that they can carry out their routine activities. On the other hand, merchant banking refers to the private equity activities of banks.
The middle office investment services mean that the bank follows the guidelines and adheres to the rules and regulations imposed by the Government. It also implies regulation of capital. Keeping track of inflow and outflow of cash is essential in knowing the liquidity that a company needs to keep. Keeping sufficient liquidity is beneficial in tiding over financial turmoil.
The back office services are the most important for an investment bank. These are concerned with different activities like making sure whether the client has brought correct securities, finding out whether the technology and the software used by the traders are up to date .It also involves trade substantiation and also finding out new strategies for trading. These services are the backbone of investment banking. However, these jobs are perceived as low-key and, therefore, many investment banks outsource these services.