One of the most lucrative areas of the business world, investment banking often puzzles even banking professionals working under its complex laws. Investment Banking For Dummies addresses common misconceptions with a simple assessment of banking fundamentals. This book traces typical university courses on the subject and helps students and professionals understand the fundamentals of investment banking. With new and updated content, this edition addresses the major financial changes that have occurred in recent years.
Investment banking is a big mystery to most people - they know it's important, but they're not sure why. On the other hand, there is no secret what the traditional banking system is. Almost everyone with a savings account has gone to a bank and looked around. But investment banking is an entirely different matter.
It's easy to dismiss investment banking as something a lot of people in suits can worry about, but that's a mistake. More and more Americans are given the keys to managing their financial future. It is up to consumers to find ways not only to save money, but also to invest in goods that will grow in the future. And mostly this process requires an interface to investment bankers and their products.
Given the importance of investment banking to the way Americans save and invest, it is important to understand what investment bankers do and what their roles are. Traditional banks are easy to understand. They take deposits from consumers and businesses and then lend money to businesses or consumers. But the tasks of investment banks are completely different. Instead of taking deposits, investment banks sell stocks. The proceeds from the sale of these securities then flow partially into the financing of mostly massive projects that can be too risky for traditional banks. The projects that investment banks undertake often fall into one of several categories, including the following:
Financing of major projects: Massive projects, such as the construction of huge bridges or power plants, usually require a lot of money in advance. These projects can ultimately make money, but they take a lot of money to build. The need for upfront liquidity is so great that it can exceed the lending capacity of traditional banks or be too risky for traditional banks. This is where investment banks can come into play. Investment banks raise money by selling stocks to investors with excess cash who are looking for an opportunity for a good return.
Distributors: It takes money to make money, a familiar saying for most entrepreneurs. Many successful businesses begin to finance themselves with credit cards or owner savings, but at some point it becomes insufficient. Entrepreneurs can turn to banks for credit, but such deals can be difficult to obtain or costly. The answer for many expanding companies is an initial public offering (IPO). The company sells itself to the public when it goes public. Investment bankers are key to this service by matching investors and finding companies willing to sell stocks to the public.
Conducting Mergers and Acquisitions: There is usually a time when companies start looking over their shoulder for opportunity. A promising startup with interesting technology could be a good match for another company's products. Rather than investing money in developing similar technologies, which can be expensive and risky, a company can ask its investment bankers to help them buy the business.
Offering asset management and brokerage services: Investment banks are active in the money market. Among other things, you collect money from customers and help these customers to use the money in such a way that a return is generated. Supporting customers in managing their money by selecting individual stocks or placing them in a mutual fund is one of the services provided by investment banks.
Whenever you buy shares in a company, you are most likely buying a sliver of that company. But for some investors, a small splinter is not enough.
Companies are constantly scanning the business landscape for other companies that may be for sale or have assets worth buying. Buying companies can be a risky endeavor. Because the only way to buy a healthy company is to offer a price higher than the current market price, known as the premium. By paying for the company, the buying company would be better off taking the right steps to make the deal work. Investment banks help prospecting companies find acquisition targets, close the deal, and sometimes even finance it.