The functions of the investment banker

the function of the investment banker

Investment bankers involves sale of security to the public. Investment bankers perform the following functions.

Origination: when a corporation decided to publicly issue additional stock, it may contact an investment banker. The investment banker can recommend the appropriate amount of stock to issue because it can anticipate the amount of stock the market can likely absorb without causing a reducing in the stock price.

Next the investment banker will evaluate the corporation’s financial condition to determine the appropriate price for the newly issued stock. If the firm has issued stock to the public before the price should be the same as the market price on its outstanding stock. If not the firm’s financial features will be compared with other similar firms in the same industry that have stock outstanding to help determine the price at which the stock should be sold.

The issuing corporation then registers with the securities and exchange commission (sec) incase of nepal the issuing firm must register with the securities board of nepal(SEBON). All information relevant to the security as well as the agreement between the issuer and the investment banker must be provided in the registration statement (prospectus) which is intended to ensure that accurate information is disclosed by the issuing corporation. After the registration company must issue.

Underwriting: the principal function of the investment banker is to buy the new securities from the issuing company and then resell them to investors. For the service investment bankers receive the compensation. The underwriters compensation is the difference between the price at which the securities are sold to the public and the price paid to the company for the securities.

Distributing: the second function of the investment banker is marketing the new issues of securities. The investment banker is a specialist with a staff and organization to distribute securities and therefore the capacity to perform the physical distribution function more efficiently and more economically than can an individual corporation. A corporation that wished to sell an issue of securities would find it necessary to establish a marketing or selling organization very expensive and ineffective method of selling securities. The investment banker has a permanent trained staff and dealer organization available to distribute securities. In addition the investment bankers reputation

For selecting good companies and pricing securities fairly builds up a broad client over time and this further increases the efficiency with which securities can be sold.

Giving advice and counseling:

The investment banker provides valuable advice to the company concerning the best way to raise funds. The investment banker is expert advisor about terms and characteristics of securities debt and equity markets and security registrations. Therefore investment bankers often sit on the boards of firms whose securities they have sold. In the way they can provide continuing financial counsel and increase the firms probability of success. 

Making the market: when a company is going public for the first time the investment banker is obligated to maintain a market for the shares after the issue has been completed. This is done in order to provide liquidity for the shares and to maintain a good relationship with both the issuer and the investors who purchased the shares. The lead underwriter agrees to make a market in the stock and keep it reasonably liquid. The company wants a good market to exist for its stock as do its stockholders. Therefore if the investment banker wants to do business with the company in the future to keep its own brokerage customers happy and to have future referral business it will hold an inventory of the shares issue periodic reports on the company and help to maintain an active secondary market in the stock.