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- Investment banking is a banking field that focuses on assisting companies to obtain funds. Apart from funds’ acquisition, investment banks provide advice on a variety of transactions that businesses make. Banks specialized in investment or commercial banking in the past. In fact, it was illegal for banks to engage in both investment and commercial banking in the USA until 1999. This became possible with the Gramm-Leach-Bliley Act. Today’s commercial banks offer various investment products in order to become one-stop shops for their clients.
Investment banks have two possible venues to generate funds. One way is to offer stake in the company in exchange for private equity or venture capital. Alternatively, banks generate funds on the capital market by drawing on public funds and trading stock.
Banks of this variety cater to a variety of stock holders, among which governments, businesses, individuals, and non-profit organizations, helping them raise money. Among their clients are municipalities, states, educational institutions, healthcare organizations, investors, and banks. Investment banks engage in various activities, including investing and lending assets, managing investment portfolios, and issuing, trading, buying, and selling bonds and stocks. Investment banks also offer advice on various financial transactions such as mergers and acquisitions and act as trading intermediaries for their customers. Finally, investment banks conduct research as to develop opinions on economies, markets, and securities.
Investment banks may follow two lines of business. First, they may trade securities for other types of securities or for cash. Second, they may invest in and promote securities through research and underwriting. Investment banks are not involved in these activities only. Merchant banking is a type of banking through which banks gain share ownership in exchange for offering capital. Examples of merchant banks are One Equity Partners and Defoe Frontier & Cie. Investment management is another branch that specializes in the management of different securities, including bonds and shares, as well as other assets. The aim is to meet the investment objectives of a variety of investors. These can be corporations, pension funds, insurance companies, and other institutions, as well as private investors. Investments can be made through mutual funds and other investment schemes or through investment contracts. Investment schemes are more common nowadays. Investment banks’ investment management units often function as separate divisions, such as Private Client Services and Private Wealth Management groups. Another sub-division of investment banking is global transaction banking, specializing in securities brokerage, custody services, lending, and cash management.
Investment banking firms also specialize in consulting and giving advice to companies. To be able to do this, they follow the market to see when it is a good time to manage the public assets of companies and to make public offerings. An investment bank will normally offer buy-and-sell advice to the businesses is represents. In general, full-service investment banks offer financial and advisory services and research on a wide variety of financial products, such as commodities, rates, currency, credit, and equities. Big investment banks include Citigroup, Barclays Capital, Merrill Lynch, JP Morgan, and others. Some investment banks are affiliated with big financial entities while others are large-cap advisory firms and independent investment banks. Examples of the latter are Thomas Weisel Partners, Robert W. Baird & Company, and others.
Most investment banks maintain markets for securities, which have been previously issued, and specialize in broker/ dealer operations. Investment banks have an important role to play in corporate structuring and private equity placement. In contrast to traditional banks, these financial institutions do not generally offer loans or accept deposits. However, some investment banks offer products much like traditional banks. J.P Morgan, for example, not only specializes in risk management and strategic advice, but lends money to its customers.