Investment banks help companies raise money, buy or sell other businesses, and handle large financial plans. They play a huge role in how the economy grows and how companies expand. If you want to work in finance or understand how business works, you must learn about these functions. The functions of investment banking cover many tasks. These include helping companies with IPOs, mergers, trading, research, and giving smart advice. Unlike regular banks that give loans or keep savings, investment banks focus only on business needs. They connect companies with investors. They also help manage risks and make sure every part of a deal works well.
What is Investment Banking?
Investment banking is a special part of the banking world. It deals only with large business and financial deals. These deals often include raising money, selling shares, buying companies, and managing risks. Investment banks do not take savings from people or give home loans. Instead, they focus on companies, governments, and big investors.
Investment banks work as advisors. They help clients decide how to raise money or expand their business. They also manage legal steps and handle all financial paperwork. Some investment banks also trade stocks and bonds for clients or their own profit.
Many top banks like Goldman Sachs, JPMorgan, and Morgan Stanley are known for investment banking. In India, ICICI Securities, Kotak Investment Banking, and SBI Capital Markets do this work.
Investment banking helps the economy grow by supporting business deals. These banks also help new companies raise money through IPOs and help big companies plan global mergers.
Capital Raising as a Function of Investment Banking
One of the most important functions of investment banking is capital raising. Every company needs money to grow. Investment banks help them get that money in smart and legal ways. They act as a bridge between the company and the investors.
Investment banks help raise money in two main ways—equity and debt. Equity means selling part of the company to investors. Debt means borrowing money through bonds or loans. Investment banks help companies decide which method is better, and they manage the full process.
They help in writing reports, pricing the shares, and finding the right investors. They also make sure that the company follows all the rules during this process.
Real Examples:
- Zomato raised ₹9,375 crore in its IPO. Banks like Kotak and Morgan Stanley managed the issue.
- LIC raised funds through India’s biggest public issue, guided by SBI Capital Markets and others.
Capital raising helps companies grow fast. It also gives them funds for projects, marketing, or buying assets.
Mergers and Acquisitions (M&A)
Another major function of investment banking is helping with mergers and acquisitions. A merger happens when two companies join together. An acquisition is when one company buys another. These deals are complex. They need smart planning, legal advice, and financial study. Investment banks help with all these steps.
They help companies find the right match. They study the value of each company. They also talk to both sides, help in setting the price, and complete all legal steps. Without investment banks, many companies would find it hard to complete these deals.
M&A helps companies become stronger. It helps them enter new markets, get new products, or cut costs by joining forces.
Tasks in M&A:
- Find companies to merge or buy.
- Study the target company’s value and future plans.
- Arrange funds for the deal.
- Talk to lawyers and regulators.
- Finalize deal structure and payments.
Investment bankers guide their clients through each of these steps.
Initial Public Offering (IPO) Management
One of the most common functions of investment banking is managing IPOs. An IPO is when a private company becomes public by selling its shares to the general public. It is a big move for any company, and investment banks manage it from start to finish.
They help in making the Draft Red Herring Prospectus (DRHP), pricing the shares, promoting the offer to investors, and listing the shares on the stock exchange. Investment banks also underwrite the IPO. This means they promise to buy the shares if no one else does.
A successful IPO needs careful planning. Investment banks bring their experience to make sure the company raises money and gains trust in the market. Steps Handled by Banks:
- Study company details and financials.
- Prepare IPO documents and submit them to SEBI.
- Set a price band and issue size.
- Market the IPO to investors.
- List shares on NSE or BSE.
This function is key for startups and growing companies who want to raise large funds quickly.
Underwriting of Securities
Underwriting is a key part of investment banking. It means the bank agrees to buy shares or bonds from a company and then sell them to the public. If no one buys, the bank will still buy them. This gives safety to the company.
There are two types of underwriting—firm and best-effort. In firm underwriting, the bank promises to buy all shares. In best-effort, it tries its best but does not promise to buy all. Investment banks study the market and decide the best option.
Underwriting helps companies raise funds with less risk. It also shows that the bank trusts the company. Benefits of underwriting are:
- Gives confidence to the company.
- Ensures minimum money is raised.
- Helps manage risk of failed issues.
- Supports share pricing and distribution.
Banks charge a fee for this service, which is a part of their earnings.
Trading and Market Making
Many investment banks also trade in the stock market. They buy and sell shares, bonds, and other assets. They do it for their clients and also for themselves. This is called proprietary trading.
Some banks also work as market makers. This means they always offer to buy and sell a share, so there is always a buyer or seller in the market. This makes markets active and less risky. Trading is a fast and technical part of investment banking. It needs smart traders, fast systems, and good research.
- Give buy and sell prices for listed shares.
- Keep the market active.
- Support fair pricing.
- Help small investors find buyers or sellers.
This helps the stock market work better for everyone.
Research and Analysis
Investment banks also do deep research. They study companies, sectors, and the market. They publish reports that help investors make smart decisions. These reports show if a stock is good to buy, sell, or hold. Analysts work in these teams. They meet company leaders, study balance sheets, and track news. They give insights that support traders and clients.
Many big investors follow these reports before they invest. This research builds the bank’s brand and helps clients trust their advice. Research Teams Cover
- Company reports
- Sector trends
- Global events and risks
- Price targets and forecasts
This function builds trust and guides market moves.
Risk Management and Advisory
Investment banks also help in managing risk. They guide clients on how to plan deals with less risk. They study laws, taxes, and market changes to suggest the best steps. They also give long-term advice on company growth, financial planning, and asset sales. This advisory service is not just about deals. It’s about guiding companies to do well.
Some banks also offer risk management tools like hedging, swaps, and insurance-linked products. Common Advisory Areas:
- Company finance and cash flow plans
- Growth and expansion strategies
- Tax and legal structuring
- Foreign investment planning
This advice helps companies avoid loss and grow smartly.
Functions of Investment Banking FAQs
1. What are the functions of investment banking?
They include capital raising, IPOs, M&A, underwriting, trading, research, and risk advisory.
2. How do investment banks raise money for companies?
They sell shares or bonds to investors and help the company get funds legally and quickly.
3. Do investment banks trade stocks?
Yes. They trade for clients and sometimes for their own profit.
4. What is underwriting in investment banking?
It means the bank agrees to buy the securities if others don’t. It reduces risk for the company.
5. Can students work in investment banking?
Yes. Students from commerce, finance, or MBA backgrounds can start as analysts or interns.
