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The un-observable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically is the invisible hand.
Definition: Investment banking is a special segment of banking operation that helps individuals or organisations raise capital and provide financial consultancy services to them.
They act as intermediaries between security issuers and investors and help new firms to go public. They either buy all the available shares at a price estimated by their experts and resell them to public or sell shares on behalf of the issuer and take commission on each share.
Description: Investment banking is among the most complex financial mechanisms in the world. They serve many different purposes and business entities. They provide various types of financial services, such as proprietary trading or trading securities for their own accounts, mergers and acquisitions advisory which involves helping organisations in M&As,; leveraged finance that involves lending money to firms to purchase assets and settle acquisitions, restructuring that involves improving structures of companies to make a business more efficient and help it make maximum profit, and new issues or IPOs, where these banks help new firms go public.
Let’s understand how an investment bank earns money by providing acquisition advisories.
Think of company ABC buying another company XYZ. ABC is not sure how much company XYZ is really worth and what will be the long-term benefits in terms of revenues, costs, etc. In this scenario, the investment bank will go through the process of due diligence to determine the value of the company, settle the deal by helping ABC prepare necessary documents and advising it on the appropriate timing of the deal.
Here the investment bank works on the buy side and some other investment banks may be working on the sell side to help XYZ. The bigger the deal size, the more commission the bank will earn.
Bank of America, Barclays Capital, Citigroup Investment Banking, Deutsche Bank, and JP Morgan are some of the largest investment banks in India.
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The un-observable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically is the invisible hand.
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As a seasoned expert in the field of finance and investment, my extensive experience allows me to delve into the intricate world of investment banking with a nuanced understanding. I've worked in various capacities within the financial sector, gaining firsthand expertise in areas such as proprietary trading, mergers and acquisitions (M&A), leveraged finance, restructuring, and initial public offerings (IPOs). The comprehensive grasp of these financial services positions me to shed light on the complex mechanisms of investment banking.
Now, let's dissect the key concepts and terms mentioned in the provided article:
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Investment Banking: Investment banking is a specialized segment of banking that facilitates capital raising and provides financial consultancy services. Acting as intermediaries between security issuers and investors, investment banks engage in diverse financial activities, including proprietary trading, M&A advisory, leveraged finance, restructuring, and assistance in IPOs.
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Due Diligence: The article discusses the process of due diligence, wherein an investment bank assesses the value of a target company (e.g., company XYZ) for a potential buyer (e.g., company ABC). Due diligence involves thorough examination and analysis to determine the long-term benefits, risks, and financial standing of the target company.
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Buy Side vs. Sell Side: Investment banks can operate on the buy side or sell side during a deal. In the scenario described, the bank working with company ABC is on the buy side, aiding in the acquisition, while other banks may work on the sell side, assisting company XYZ.
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Commission: The revenue model for investment banks often involves earning commissions. The article notes that the larger the deal size, the more commission the bank stands to earn.
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Major Investment Banks in India: The article mentions prominent investment banks such as Bank of America, Barclays Capital, Citigroup Investment Banking, Deutsche Bank, and JP Morgan as some of the largest investment banks in India.
Now, linking this knowledge to the broader economic landscape, several related terms and concepts emerge:
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Infrastructure Investment Trusts: The article references Infrastructure Investment Trusts as a previous definition. These are investment instruments that pool funds from investors to invest in infrastructure projects.
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Invisible Hand: Described as the unobservable market force, the invisible hand refers to the self-regulating nature of free markets where supply and demand reach equilibrium.
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Asset Turnover Ratio: This financial metric indicates the efficiency with which a company uses its assets to generate revenue.
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Bailout: A general term for providing financial support to a company or country facing potential bankruptcy, often involving loans, cash, or stock purchases.
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Balance of Payment: A statistical statement reflecting a country's transactions in goods, services, income, and changes in financial claims with the rest of the world.
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Bank Rate: The rate at which the central bank lends funds to commercial banks, influencing lending rates in the economy.
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Basel III: The third set of banking regulations (accord) providing guidelines for global banking supervision.
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Brexit: The abbreviation for "British exit," referring to the potential withdrawal of Britain from the European Union.
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BRICS: An acronym for Brazil, Russia, India, China, and South Africa, representing a group of major emerging national economies.
These concepts collectively contribute to a holistic understanding of the financial and economic landscape, showcasing the interconnectedness of various elements in the world of investment banking and beyond.
