What is investment banking and what does it do?

Investment banking is a special segment of banking operation that helps individuals or organizations raise capital and provide financial consultancy services to them. They act as intermediaries between security issuers and investors and help new firms to go public. They either buy all the available shares at a price estimated by their experts and resell them to public or sell shares on behalf of the issuer and take commission on each share.

Ultimately, investment banks serve as middlemen between a company and investors when the company wants to issue stock or bonds. The investment bank assists with pricing financial instruments to maximize revenue and with navigating regulatory requirements. Often, when a company holds its initial public offering (IPO), an investment bank will buy all or much of that company’s shares directly from the company. However, as a proxy for the company holding the IPO, the investment bank will sell the shares on the market. This makes things much easier for the company itself, as they effectively contract out the IPO to the investment bank. Moreover, the investment bank stands to make a profit, as it will generally price its shares at a markup from the price it initially paid. Yet, in doing so the investment bank also takes on a substantial amount of risk. Though experienced analysts at the investment bank use their expertise to accurately price the stock as best they can, the investment bank can lose money on the deal if it turns out they have overvalued the stock, as in this case they will often have to sell the stock for less than they initially paid for it.

Investment banks help individuals and companies raise capital. Investment banking is a good route to go if you are an entrepreneur or if you want to run your own company. Investment banking can be very risky but it can be very beneficial in the end.

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Why Investment Banking is Important

Most people don’t realize it, but the modern economy is a huge global network.  Many of the products that you use are obviously made in other parts of the world, but what’s less obvious is that the money you deposit and withdraw also travels across the world as well.

When you deposit and withdraw money from an ATM, it goes to and from your local bank.  However, you then have to ask where your local bank gets it’s money from, and it turns out that your local bank gets money from the global network.  You buy a plastic toy, that money goes to a factory in China.  That factory in China might choose to spend that money, in which case it goes back to some person in the US.  Alternatively, they may choose to save that money in which case it ends up buying some investment in the US, and may end up either paying for some ones medicare paid hospital bill or else someone’s mortgage.

When the government prints money it does so by electronically buying US treasuries.  Since the government doesn’t want to keep track of who wants to buy US bonds, it buys and sells through a network of banks who they sell/buy those bonds from their customers.

So you have sort a virtual network in which tens of billions of dollars flows through.  Investment banks are sort of the “money superhighway” and form the key ideas that make the world economic system work.


One good thing about the system is that the “money grid” is like the power grid or the internet, you don’t notice it because most of the time, it just works.  However, when it stops working, then you have massive amounts of disruption.
Investment banking is a worldwide process that is becoming very popular. The whole world has to work together in order for investment banking to work.