1. Investment Banking
An investment bank is a financial institution which raises capital, trades securities, and manages
corporate mergers and acquisitions. Another term used for investment banking is corporate finance.
Investment banks work for companies and governments, and profit from them by raising money
through the issuance and selling of securities in capital markets (both equity and debt) and insuring
bonds (for example selling credit default swaps), and providing the necessary advice on transactions
such asmergers and acquisitions. Most of investment banks provide strategic advisory services for
mergers, acquisitions, divestiture or other financial services for clients, like the trading of derivatives,
commodity, fixed income, foreign exchange, and equity securities.
Investment banking is a form of banking which finances the capital requirements of enterprises.
Investment banking assists as it performs IPOs, private placement and bond offerings, acts as broker and
helps in carrying out mergers and acquisitions.
An Investment Banker can be considered as a total solutions provider for any corporate, desirous of
mobilizing its capital. The services provided range from investment research to investor service on the
one hand and from preparation of the offer documents to legal compliances & post issue monitoring on
the other. A long lasting relationship exists between the Issuer Company and the Investment Banker.
Functions of Investment Banking:
Investment banks carry out multilateral functions. Some of the most important functions of investment
banking are as follows:
Investment banking helps public and private corporations in issuance of securities in the primary
market. They also act as intermediaries in trading for clients.
Investment banking provides financial advice to investors and helps them by assisting in
purchasing and trading securities as well as managing financial assets
Investment banking differs from commercial banking as investment banks don't accept deposits
neither do they grant retail loans.
Small firms which provide services of investment banking are called boutiques. They mainly
specialize in bond trading, providing technical analysis or program trading as well as advising
for mergers and acquisitions
Core activities of Investment Banking
Investment banking: is the traditional aspect of investment banks that involves helping
customers raise funds in the capital markets and advise them on mergers and acquisitions.
Investment banking can also involve subscribing investors to a security issuance, negotiating
with a merger target and coordinating with bidders.

2. Sales and trading: Depending on the needs of the bank and its clients, the main function of a
large investment bank is buying and selling products. In market making, the traders will buy and
sell securities or financial products with the goal of earning an incremental amount of money on
every trade. Sales is the term that is used for the sales force, whose primary job is to call on
institutional and high-net-worth investors to suggest trading ideas and take orders
Research: is the division of investment banks which reviews companies and makes reports
about their prospects, often with "buy" or "sell" ratings. Although the research division
generates no revenue, its resources can be used to assist traders in trading, can be used by the
sales force in suggesting ideas to the customers, and by the investment bankers for covering
their clients.
As the credit crisis unfolded, I've heard a lot of investors asking the question "What is an investment
bank and how does it differ from a regular, commercial bank?" Unless you work in finance, you may not
have come across the term investment bank before the global meltdown began.
To put it simply, an investment bank is nothing like the corner institution you're used to dealing with to
get a business loan or deposit your paycheck. Instead, an investment bank is a special type of financial
institution that works primarily in higher finance by helping company access the capital markets
(stock market and bond market, for instance) to raise money for expansion or other needs. If Coca-Cola
Enterprises wanted to sell $10 billion worth of bonds to build new bottling plants in Asia, an investment
bank would help them find buyers for the bonds and handle the paperwork, along with a team of
lawyers and accountants.
In the next few minutes, you're learn how investment banks make their money and why they helped
cause one of the greatest financial meltdowns in history.
Activities of a Typical Investment Bank
A typical investment bank will engage in some or all of the following activities:
Raise equity capital (e.g., helping launch an IPO or creating a special class of preferred stock that
can be placed with sophisticated investors such as insurance companies or banks)
Raise debt capital (e.g., issuing bonds to help raise money for a factory expansion)
Insure bonds or launching new products (e.g., such as credit default swaps)
Engage in proprietary trading where teams of in-house money managers invests or trades the
company's own money for its private account (e.g., the investment bank believes goldwill rise so
they speculate in gold futures, acquire call options on gold mining firms, or purchase gold
bullion outright for storage in secure vaults).

3. Up until ten years ago, investment banks in the United States were not allowed to be part of a larger
commercial bank because the activities, although extremely profitable if managed well, posed far more
risk than the traditional lending of money done by commercial banks. This was not the case in the rest of
the world. Countries such as Switzerland, in fact, often boasted asset management accounts that
allowed investors to manage their entire financial life from a single account that combined
banking, brokerage, cash management, and credit needs.
Most of the problems you've read about as part of the credit crisis and massive bank failures were
caused by the internal investment banks speculating heavily with leverage oncollateralized debt
obligations (CDOs). These losses had to be covered by the parent bank holding companies, causing huge
write-downs and the need for dilutive equity issuances, in some cases nearly wiping out regular
stockholders. A perfect example is the venerable Union Bank of Switzerland, or UBS, which reported
losses in excess of 21 billion CHF (Swiss Francs), most of which originated in the investment bank. The
legendary institution was forced to issue shares as well as mandatory convertible securities, diluting the
existing stockholders, to replace the more than 60% of shareholder equity that was obliterated during
the meltdown.
The Buy Side vs. Sell Side of an Investment Bank
Investment banks are often divided into two camps: the buy side and the sell side. Many investment
banks offer both buy side and sell side services. The sell side typically refers to selling shares of newly
issued IPOs, placing new bond issues, engaging in market makingservices, or helping clients facilitate
transactions. The buy side, in contrast, worked with pension funds, mutual funds, hedge funds, and the
investing public to help them maximize their returns when trading or investing in securities such as
stocks and bonds.
Front Office, Middle Office, and Bank Office
Many investment banks are divided into three categories that deal with front office, back office, or
middle office services.
Front Office Investment Bank Services: Front office services typically consist of investment
banking such as helping companies in mergers and acquisitions, corporate finance (such as
issuing billions of dollars in commercial paper to help fund day-to-day operations, professional
investment management for institutions or high net worth individuals, merchant banking (which
is just a fancy word for private equity where the bank puts money into companies that are not
publicly traded in exchange for ownership), investment and capital market research reports
prepared by professional analysts either for in-house use or for use for a group of highly
selective clients, and strategy formulation including parameters such as asset allocation and risk
limits.
Middle Office Investment Bank Services: Middle office investment banking services include
compliance with government regulations and restrictions for professional clients such as banks,
insurance companies, finance divisions, etc. This is sometimes considered a back office function.

4. It also includes capital flows. These are the people that watch money coming into and out of the
firm to determine the amount of liquidity the company needs to keep on hand so that it doesn't
get into financial trouble. The team in charge of capital flows can use that information to restrict
trades by reducing the buying / trading power available for other divisions.
Back Office Investment Bank Services: The back office services include the nuts and bolts of the
investment bank. It handles things such as trade confirmations, ensuring that the correct
securities are bought, sold, and settled for the correct amounts, the software and technology
platforms that allow traders to do their job are state-of-the-art and functional, the creation of
new trading algorithms, and more. The back office jobs are often considered unglamorous and
some investment banks outsource to specialty shops such as custodial companies. Nevertheless,
they allow the whole thing to run. Without them, nothing else would be possible.