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What Is Investment Banking?
Commerci Commercial al banks and investmen investmentt banks banks perform perform primaril primarily y different different function function.. When Mrs. Smith needed loan to buy a car she had to go to commercial commercial banks, but when ALFA needed to raise cash to fund an acquisition or to build more factories it had to go to investment banks. Investment banking is not one specific function or service but rather an umbrella term for arrange arrange of activitie activities. s. Investment Investment banks help companies, companies, governmen governmentt instit ins titut ution ions, s, non-pr non-profi ofitt ins instit titut ution ions, s, inves investor tors s and indivi individua duall about about financ financial ial transact transactions ions.. To issue issue securitie securities s (underwr (underwriting iting), ), manage manage portfolio portfolios s of financia financiall assets, trade securities (stock and bonds), purchase security and provide financial advice advice (merger (merger and acquisit acquisitions ions)) and support support services. services. (from Career Career Central Central Magazine) Magazine) Investment Banks activities tipically divide as three distincts first is Traditional Investment Banking, it is consists capital raising and strategic advisory services. Second is Sales and Trading, it is consists Distribution and execution arm of the investment bank, Sells and trades stocks and bonds, and Manages the firm’s risk and makes markets for the securities underwritten by the investment bank. Third is Research it is consists analysis and recommendations recommendations of stocks and bonds, and Includes company coverage and sector coverage. (form Citigroup) Citigroup)
Organizational structure of an investment banks
Main activities and units An investment bank is divided into front office, office , middle office, office , and back office. office. While large full-service investment banks offer all of the lines of businesses, both sell sell sid side e and buy sid side e, smal smalle lerr sell sell side side inve invest stme ment nt firm firms s such such as boutique investment banks and small broker-dealers will focus on investment banking and sales/trading/research, sales/trading/research, respectively. Invest Investmen mentt banks banks offer offer securi security ty to both both corpor corporati ations ons iss issuin uing g securi securitie ties s and investors buying securities. For corporations, corporations, investment bankers offer information on when and how to place their securities in the market. The corporations do not have to spend on resources with which it is not equipped. To the investor, the responsi responsible ble investmen investmentt banker banker offers offers protectio protection n against against unsafe unsafe securiti securities. es. The offering of a few bad issues can cause serious loss to its reputation, and hence loss of business. Therefore, investment bankers play a very important role in issuing new security offerings.
Core investment banking activities
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Investment banking is the traditional aspect of the investment banks which also involves helping customers raise funds in the capital markets and giving advice on mergers and acquisitions. Investment banking may involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Another term for the investment banking division is corporate finance, and its advisory group is often termed mergers and acquisitions (M&A). A pitch book of financial information is generated to market the bank to a potential M&A client; if the pitch is successful, the bank arranges the deal for the client. The investment banking division (IBD) is generally divided into industry coverage and product coverage groups. Industry coverage groups focus on a specific industry such as healthcare, industrials, or technology, and maintain relationships with corporations within the industry to bring in business for a bank. Product coverage groups focus on financial products, such as mergers and acquisitions, leveraged finance, equity, and high-grade debt and generally work and collaborate with industry groups in the more intricate and specialized needs of a client. Sales and trading: On behalf of the bank and its clients, the primary function of a large investment bank is buying and selling products. In market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on caveat emptor basis) and take orders. Sales desks then communicate their clients' orders to the appropriate trading desks, who can price and execute trades, or structure new products that fit a specific need. Structuring has been a relatively recent activity as derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities. Strategists advise external as well as internal clients on the strategies that can be adopted in various markets. Ranging from derivatives to specific industries, strategists place companies and industries in a quantitative framework with full consideration of the macroeconomic scene. This strategy often affects the way the firm will operate in the market, the direction it would like to take in terms of its proprietary and flow positions, the suggestions salespersons give to clients, as well as the way structurers create new products. Banks also undertake risk through proprietary trading, done by a special set of traders who do not interface with clients and through "principal risk", risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet. The necessity for numerical ability in sales and trading has created jobs for physics,math and engineering Ph.D.s who act as quantitative analysts. Research is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. While the research division generates no revenue, its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment
bankers by covering their clients. There is a potential conflict of interest between the investment bank and its analysis in that published analysis can affect the profits of the bank. Therefore in recent years the relationship between investment banking and research has become highly regulated requiring a Chinese wall between public and private functions.
Middle office •
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Risk management involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall. Another key Middle Office role is to ensure that the above mentioned economic risks are captured accurately (as per agreement of commercial terms with the counterparty ), correctly (as per standardized booking models in the most appropriate systems) and on time (typically within 30 minutes of trade execution). In recent years the risk of errors has become known as "operational risk" and the assurance Middle Offices provide now includes measures to address this risk. When this assurance is not in place, market and credit risk analysis can be unreliable and open to deliberate manipulation. Corporate treasury is responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring. Financial control tracks and analyzes the capital flows of the firm, the Finance division is the principal adviser to senior management on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses. In the United States and United Kingdom, a Financial Controller is a senior position, often reporting to the Chief Financial Officer. Corporate strategy, along with risk, treasury, and controllers, often falls under the finance division as well. Compliance areas are responsible for an investment bank's daily operations' compliance with government regulations and internal regulations. Often also considered a back-office division.
Back office •
Operations involves data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. While some believe that operations provides the greatest job security and the bleakest career prospects of any division within an investment bank, many banks have outsourced operations. It is, however, a critical part of the bank. Due to increased competition in finance related
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careers, college degrees are now mandatory at most Tier 1 investment banks. A finance degree has proved significant in understanding the depth of the deals and transactions that occur across all the divisions of the bank. Technology refers to the information technology department. Every major investment bank has considerable amounts of in-house software, created by the technology team, who are also responsible for technical support. Technology has changed considerably in the last few years as more sales and trading desks are using electronic trading. Some trades are initiated by complex algorithms for hedging purpose
Other businesses that an investment bank may be involved in •
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Global transaction banking is the division which provide cash management, custody services, lending, and securities brokerage services to institutions. Prime brokerage with hedge funds has been an especially profitable business, as well as risky, as seen in the " run on the bank" with Bear Stearns in 2008. Investment management is the professional management of various securities (shares, bonds, etc.) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds). The investment management division of an investment bank is generally divided into separate groups, often known as Private Wealth Management and Private Client Services. Merchant banking is a private equity activity of investment banks. [2] Current examples include Goldman Sachs Capital Partners and JPMorgan's One Equity Partners. (Originally, "merchant bank" was the British English term for an investment bank.) Commercial banking is an institution which accepts deposits, makes business loans, and offers related services. Commercial banks also allow for a variety of deposit accounts, such as checking, savings, and time deposit. These institutions are run to make a profit and owned by a group of individuals, yet some may be members of the Federal Reserve System. While commercial banks offer services to individuals, they are primarily concerned with receiving deposits and lending to businesses.
Investment Banking in Indonesia According to DBS Indonesia, it provides a wide range of investment banking services in collaboration with DBS Vicker Securities Indonesia and DBS Bank. The invesment banking services includes:
Capital Markets
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Deliver comprehensive capital markets capabilities to Indonesian corporations in strategic partnership with DBS Vickers Securities Indonesia. DBS is a recognized leader in regional capital markets, and it has been providing well respected debt & equity financial solutions to Indonesian corporations. DBS Vickers Securities Indonesia is amongst Indonesia’s top stockbrokers and is licensed to underwrite both equity and debt securities by BAPEPAM.
Advisory Services •
DBS also provides advisory services through its Merger & Acquisition division assisting and advising leading Indonesian corporations to meet their strategic corporate objectives regionally.