Investment banking plays an important role in many financial activities undertaken by governments and companies. Here are the main deals that they take part in.
Sorting Out Financing
In the event that a big company wishes to build a new factory and they do not have the cash to do so, they might choose to get a bond to raise the funds to complete the job. The costs will be paid from the proceeds of the increased production.
If a government needs to finance large projects, it will also need to raise the cash needed, and then it would be paid back from future revenues.
In both cases, investment banking will be involved to secure the finance required. A banker, like Chardan Capital, will plan for the funds, get them priced correctly, and complete the necessary documentation.
Selling stock or bonds is the most cost-effective way a company can finance its growth. The investment banker will be taking part in the arranging of equity financing, or the sale of the stock.
If a new company wants to raise money in order to expand its business, it will need to launch an IPO (initial public offering). They would hire an investment banker to draw up a prospectus for investors to understand the terms and risks involved.
Once this is done, the offering has to be managed by means of marketing, letting the media know, and getting approval from the SEC (Securities and Exchange Commission.
Pricing the offer is extremely important. If the price is too high, investors may not be interested and the IPO will be a total flop. If the price is too low, the banker is potentially losing their client money.
An investment banker is very involved with each step of this process.
While bankers arrange finance, they often do the underwriting for their clients as well. By doing so, they take on most of the risk by buying the shares and then reselling them to the buyers.
When it comes to this part of investment banking, they will sell the shares at a markup. The difference between the purchase and markup price is known as the underwriting spread, which is their profit.
Normally the lead investment banker will work with a group of bankers (syndicate) to underwrite these deals in order to spread the risk amongst a few players.
Sometimes the bankers will only act as the go-between and not underwrite the deal. In this case, they will be paid a commission on the securities that they sell.
Arranging of Private Placements
Not every company wants to go public. In this case, the bankers will assist them with getting funds from the private sector. If this is the case, the banker will be expected to have all the necessary contacts to get the deal done.
For example, a company can sell the entire offering to one institution, which will be much quicker and easier than registering for the SEC. There are fewer regulations involved in getting this type of financing.
Negotiating of Mergers and Acquisitions
merging with another company or acquiring one takes time. Investment bankers are essential for this negotiating process. Arriving at a fair price often takes a lot of time.