Final Project Report on Investment Banking

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Project on : Investment Banking











Guide: Jayalaxmi Mam

Topics of Investment Banking:-











Overview ~Evolution of Investment Banking ~Its Mechanism (statement of investment banking) Products/Services Offered ~Lists of explanation ~Special services How these services server the purpose of clients? Risks associated with investment banking? ~Types ~Explanation (example){problem impact} How the risks are managed effectively? ~Why risks management? ~Ways (example){problem action} Future Scenario Conclusion











INTRODUCTION

At a very macro level, ‘Investment ‘Invest ment Banking’ as term suggests, is concerned with the primary function of assisting the capital market in its function of capital intermediation, i.e., the movement of financial resources from those who have them (the Investors), to those who need to make use of them for generating GDP (the Issuers). Banking and financial institution on the one hand and the capital market on the other are the two broad platforms of institutional that investment for capital flows in economy. Therefore, it could be inferred that investment banks are those institutions that are counterparts of banks in the capital markets in the function of intermediation in the resource allocation. Nevertheless, it would be unfair to conclude so, as that would confine investment banking to very narrow sphere of its activities in the modern world of high finance. Over the decades, backed by evolution and also fuelled by recent technologies developments, an investment banking has transformed repeatedly to suit the needs of the finance community and thus become one of the most vibrant and exciting segment of financial services. Investment bankers have always enjoyed celebrity status, but at













To continue from the above words of John F. F. Marshall and M.E. Eills, ‘investment banking is what investment banks do’ . This definition can be explained in the context of how investment banks have evolved in their functionality and how history and regulatory intervention have shaped such an evolution. Much of investment banking in its present form, thus owes its origins to the financial markets in USA, due o which, American investment banks have banks have been leaders in the American and Euro markets as well. Therefore, the term ‘investment banking’ can arguably be said to be of American origin. Their counterparts in UK were termed as ‘merchants banks’ since since they had confined themselves to capital market intermediation until the US investments banks entered the UK and European markets and extended the scope of such businesses. Investment banks help companies and governments and their agencies to raise money by issuing and selling securities in the primary market. They assist public and private corporations in raising funds in the capital markets (both equity and debt), debt ), as well as in providing strategic advisory services for mergers mergers,, acquisitions and other types of financial transactions.

Investment banks also act as intermediaries in trading for f or clients. Investment banks differ from commercial banks, banks , which take deposits and make commercial and retail r etail loans. In recent years, however, the lines between the two types of structures have blurred, especially as commercial banks have offered more investment banking services. In the US, the Gla Glass ss--St Steag eagall all Act, Act , initially created in the wake of the Stock Market Crash of 1929, 1929 , prohibited banks from both accepting deposits and underwriting securities; Glass-Steagall was repealed by the Gramm-Leach-Bliley Act in 1999 1999.. Investment banks may also differ from brokerages from brokerages,, which in general assist in the purchase and sale of stocks of stocks,, bonds, and mutual funds. However some











Definition

An individual or institution, which acts as an underwriter or agent for corporations and municipalities issuing securities. Most also maintain broker/dealer operations, maintain markets for previously issued securities, and offer advisory services to investors. Investment banks also have a large role in facilitating mergers and acquisitions, private equity placements and corporate restructuring. Unlike traditional banks, investment banks do not accept deposits from and provide loans to individuals. Also called investment banker. Who needs an Investment Bank?

Any firm contemplating a significant transaction can benefit from the advice of an investment bank. Although Although large corporations often have sophisticated finance and corporate development departments provide objectivity, objectivity, a valuable contact network, allows for efficient use of client personnel, and is vitally interested in seeing the transaction close. Most small to medium sized companies do not have a large in-house staff, and in a financial transaction may be at a disadvantage versus larger competitors. co mpetitors. A quality quality investment banking firm can provide the services required to initiate and execute a major transaction, thereby empowering small to medium sized companies with financial and transaction experience without the addition of permanent overhead, an investment bank provides objectivity, a valuable contact network, allows for efficient use of client personnel, and is vitally interested in seeing the transaction











through proprietary trading, done by a special set of traders who do not interface with clients and through Principal Risk , risk undertaken by a trader after he or she buys or sells a product to a client and does not hedge his or her total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet An investment bank is split into the so-called Front Office, Middle Office and Back Office. The individual activities are described below: Front Office •

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Investment Banking is the traditional aspect of investment banks which involves helping customers raise funds in the Capital Markets and advising on mergers and acquisitions acquisitions.. Investment bankers prepare idea pitches that they bring to meetings with their clients, with the expectation that their effort will be rewarded with a mandate when the client is ready to undertake a transaction.. Once mandated transaction mandated,, an investment bank is responsible for preparing all materials necessary for the transaction as well as the execution of the deal, which may involve subscribing investors to a security issuance, issuance , coordinating with bidders with bidders,, or negotiating with a merger target. target. Other terms for the Investment Banking Division include Mergers & Acquisitions (M&A) and Corporate Finance (often pronounced "corpfin"). Investment management is the professional management of various securities (shares (shares,, bonds etc) and other assets (e.g. real estate), estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance ( insurance companies, companies , pension funds, funds , corporations etc.) or private investors (both directly via investment contracts and more commonly











force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on caveat emptor basis) emptor basis) and take orders. Sales desks then communicate their clients' orders to the appropriate trading desks, which can price and execute trades, or structure new products that fit a specific need. ○

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Research is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" " sell" ratings. While the research division generates no revenue, its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. In recent years the relationship between investment banking and research has become highly regulated, reducing its importance to the investment bank. Structuring has been a relatively recent division as derivatives have come into play, with highly technical and numerate employees working on creating complex structured s tructured products which typically offer much greater margins and returns than underlying cash securities.

Middle Office •

Risk Management involves analysing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall. Another key Middle











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Operations involve data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. While it provides the greatest job security of the divisions within an investment bank, it is a critical part of the bank that tha t involves managing the financial information of the bank and ensures efficient capital markets through the financial reporting function. The staff in these areas are often highly qualified and need to understand in depth the deals and transactions that occur across all the divisions of the bank.

Recent evolution of the business New products Investment banking is one of the most global industries and is hence continuously challenged to respond to new developments and innovation in the global financial markets. Throughout the history of investment banking, many have theorized that all investment banking products and services would be commoditized commoditized.. New products with higher margins are constantly invented and manufactured by bankers in hopes of winning over clients and developing trading know-how in new markets. However, since these can usually not be patented or copyrighted or copyrighted,, they are very often copied quickly by competing banks, pushing down trading margins. For example, trading bonds and equities for customers is not a commodity business but structuring and trading derivatives is highly profitable .Each OTC contract has to be uniquely structured and could involve complex pay-off and risk profiles. Listed option contracts are traded through major exchanges, such as the CBOE, and are almost as commoditized as general equity securities.

In addition, while many products have been commoditized, an increasing amount of profit within investment banks has come from fr om proprietary trading, where size













Some of the conflicts of interest that can be found in investment banking are listed here: •

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Historically, Historically, equity research firms were founded f ounded and owned by investment banks. One common practice is for equity analysts to initiate coverage on a company in order to develop relationships that lead to highly profitable investment banking business. In the 1990s, many equity researchers allegedly traded positive stock ratings directly for investment banking business. On the flip side of the coin: companies would threaten to divert investment banking business to competitors unless their stock was rated favorably. favorably. Politicians acted to pass laws to criminalize such acts. Increased pressure from regulators and a series of lawsuits, settlements, and prosecutions curbed this business to a large extent following the 2001 stock market tumble Many investment banks also own retail brokerages. Also during the 1990s, some retail brokerages sold consumers securities which did not meet their











Raising capital, advising in mergers and acquisitions, executing securities sales and trading, and performing general advisory services. Most of the major Wall Wall Street firms are active in each of these categories. Smaller investment banks may specialize in two or three of these categories. Raising Capital

An investment bank can assist a firm fir m in raising funds to achieve a variety of objectives, such as to acquire another company, company, reduce its debt load, expand existing operations, or for specific project financing. Capital can include some combination of debt, common equity, equity, preferred equity, and hybrid securities such as convertible debt or debt with warrants. Although many people associate raising capital with public stock offerings, a great deal of capital is actually raised through private placements with institutions, specialized investment funds, and private individuals. The investment bank will work with the client to structure the transaction to meet specific objectives while being attractive to investors.











Terms Related Re lated To Investment Bank

Buying and Selling Buying

Deciding on the proper time to purchase a security that you would like to add to your holdings can be a daunting task. If the price drops immediately after you buy, it may seem as if you missed out on a better buying opportunity. opportunity. If the price jumps right before you make your move, you may feel as if you paid too much. As it turns out, you should not let these small fluctuations influence your decision too much. As long as the fundamentals that led you to decide on the purchase have not changed, a few points in either direction should not have a large impact on the long-term value of your investment. Similarly, Similarly, the fact that an investment has been increasing in value of late is not a sufficient reason for you to purchase it. Momentum can be very fickle, and recent movement is not necessarily an indicator of future f uture movement. Therefore, buying











money into action. Make some mock purchases based on your personal analysis technique and track the results. Not all of your decisions will lead to the results you were expecting, but if most of your choices turn out to be good and there are mitigating factors that you can learn from to explain your missteps, then you may be ready to put your analysis technique and investing strategy into action. At this point, the need to continuously monitor your investments does not disappear. disappear. Both under performers perfor mers and overachievers should s hould be studied carefully to fine-tune your strategy. You You should also regularly look at your securities to make sure that the fundamentals for success that led you to buy in the first f irst place are intact. If not, you may need to prepare to cash in and start looking for the next opportunity. One way to avoid the hassles of deciding when to buy altogether is to practice dollar-cost averaging. This strategy advocates investing a fixed dollar amount at regular intervals. The price when you first invest is relatively unimportant (as long as the fundamentals are sound) because you will be purchasing shares at a different price each time you buy. The success of your investment then lies not with short-











no longer meets the criteria that led to its purchase, selling may in fact be the best option. Selling may also become necessary if investment goals change over time. You You may need to reduce the amount of risk in your portfolio or you may have the opportunity to seek out greater returns. Additionally Additionally,, a security may have increased in value to the point that it is overvalued. This creates an excellent opportunity to cash in and seek out new undervalued investments. Often you will need to make this type of sale in the course of rebalancing a portfolio necessitated by gains and losses in different areas. Selling can be especially difficult when an under performing stock must be dumped. Some investors let their emotions dictate their actions and hold on to stocks that have fallen in value rather than to sell, thinking that selling at a loss is like admitting that they made a mistake. However, realizing the loss and moving on to better investments is often preferable to continuing to hold onto a loser in the hopes that it will somehow rebound.













1. Start Investing Now

We say this not just to discourage procrastination, but because an early start can make all the difference. In general, every six years you wait doubles the required monthly savings to reach the same level of retirement income. Another Another motivational statistic: If you contributed some amount each month for the next nine years, and then nothing afterwards, or if you contributed nothing for the first nine years, then contributed the same amount each month for f or the next 41 years, you would have about the same amount. Compounding is a beautiful thing. 2. Know Yourself Yourself











know what investments are right for you. If you've transitioned from a debt situation to paycheck-to-paycheck situation situation to a saving some money every month situation, you’re ready to begin investing what you save. You You should start by amassing enough to cover three to six months of expenses, and keep this money in a very safe investment like a money market account, so you're prepared in the event of an emergency. emergency. Once you've saved up this emergency reserve, you can progress to higher risk (and higher return) investments: bonds for money that you expect to need in the next few years, and stocks or stock mutual funds for the rest. Use dollar cost averaging, by investing about the same amount each month. This is always a good idea, but even more so with the dramatic fluctuations in the market in the past 10 years. Dollar cost averaging will make it easier to stomach the inevitable dips.











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Stocks: 10.2% (and small company stocks were 12.1%)

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Intermediate term treasury bonds: 5.1%

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30-day T-bills: 3.7% But is it really worth the additional risk just for a few percentage points? The answer is yes. 10% a year for 20 years is 570%, but 7% a year for 20 years is only 280%. Compounding is God's gift to long-term planners. If you buy outstanding companies, and hold them through the market's gyrations, you will be rewarded. If you aren't good at selecting stocks, select some mutual funds. If you aren't good at selecting mutual funds, go with an index fund (like the Vanguard S&P 500).











7. Develop the Right Attitude The following personality traits will help you achieve financial success: •

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Discipline: Develop a plan, and stick with it. As you continue to learn, you’ll become more confident that you're on the right track. Alter your asset allocation based on changes in your personal situation, not because of some short-term market fluctuation. Confidence: Let your intelligence, not your emotions; make your decisions for you. Understand that you will make mistakes and take losses; even the best investors do. Re-evaluate your strategy from time to time, but don't second-guess











Initial Public Offerings

Initial Public Offerings (IPOs) are the first time a company sells its stock to the public. Sometimes IPOs are associated with huge first-day gains; other times, when the market is cold, they flop. It's often difficult for an individual investor to realize the huge gains, since in most cases only institutional investors investors have access to the stock at the offering price. By the time the general public can trade the stock, most of its first-day gains have already been made. However, a savvy and informed investor should still watch the IPO market, because this is the first opportunity to













remains the same. In accordance with the Securities Act of 1933, the corporation will file a registration statement with the Securities and Exchange Commission (SEC). The











buy in. The system is one of reciprocal back scratching, in which the underwriters offer the shares first to the clients who have brought them the most business recently. recently. By the time the average investor gets his hands on a hot IPO, it's on the secondary market, and the stock's price has already shot up.











a competent Government agency as in UK (SIB) or in USA (SEC) is needed. As referred to earlier, malpractices have been reported in both











c) Promotion Promotion of efficie efficient nt services services by brokers, brokers, merchant merchant bankers bankers and and others intermediaries so that they become competitive and professional.











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Final Project Report on Investment Banking

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