Trading Stocks - Investment Banking
Investment bankers are firms that specialize in helping companies and governments in marketing a new debt or equity security issue to pay for capital expenditures like buildings and machinery. The term investment banker can be misleading, however. For one thing, investment banks do not accept deposits or make loans as other banks do. Nor do they permanently invest their own funds in the securities they issue. Rather, their general function is to purchase new issues of stocks and bonds from corporations and governments and to arrange for the sale of those securities to the investing public. The sale of new securities to raise funds is a primary market transaction.
In the early years, investment banks operated principally in the primary market. More recently, most of their revenues have been derived from trading in the secondary market. After a new issue of stocks or bonds is sold in the primary market, subsequent trades of the securities take place in the secondary market. When bringing an issue to the primary market, an investment banker typically provides the client company with four basic services. Advisement: initially, the investment banker will serve in an advisory capacity. When a company or government decides to raise capital, the investment banker offers advice on the amount of funds needed and the available means of raising it.
Specifically, the banker will assist the issuer in making the determination as to the general characteristics of the issue and price and the timing of the offering. In addition, the banker may assist clients in analyzing mergers, acquisitions, and refinancing of operations. Administration: after the decision to issue the securities is made, the banker helps the client company complete the paperwork and satisfy legal requirements. It is very important to file a registration statement with the Securities and Exchange Commission (SEC) before each security offering. Most of the information contained in the registration statement is also included in the prospectus. This document must be distributed to every investor who is considering the purchase of the new security.
Risk Bearing: Investing bankers generally agree to buy all of a corporation's new securities at a specified price. They then resell those securities in small units to individual and institutional investors. This process is known as underwriting. The underwriting process involves risk because of the time interval between purchase by the banker and the sale of the securities to the investor. During this interval, market conditions may deteriorate, forcing the bankers to sell them at loss. If the issuance is too large for a single banker to handle, it can form a temporary partnership with other investment banks. Such partnerships are called syndicates. The advantage of a syndicate is that it spreads the risk of loss over all of the investment banks in the group.
Distribution: the distribution service involves the marketing or sale of the securities after they are purchased from the issuer. Once the syndicate receives the securities, members are allocated their portion of the securities to sell at the predetermined price. The bankers earn their income by selling the securities at a price that exceeds what they paid. This difference is known as the spread. The selling costs for common stock are much greater than those incurred for selling bonds. Bonds are sold in large blocks to a few large institutional investors, whereas common stock usually is sold to large numbers of individual and institutional investors.
CL King and Associates is an investment bank and self-clearing broker-dealer. The company has worked as a Co-Manager for Bond Offering, Subordinated Notes Offering, Notes Offering for the reputed firms such as Citigroup, Walmart, AT&T’s etc. If you want to find more, please call at 518.447.8050