42 Investment bank services: raising capital by underwriting.

Investment banks capital are middlemen between a company that wants to issue new securities and the buying public. So when a company wants to issue, say, new bonds to get funds to retire an older bond or to pay for an acquisition or new project, the company hires an investment bank. The investment bank then determines the value and riskiness of the business in order to price, underwrite, and then sell the new bonds. Banks also underwrite other securities (like stocks) through an initial public offering (IPO) or any subsequent secondary (vs. initial) public offering.

When an investment bank underwrites stock or bond issues, it also ensures that the buying public – primarily institutional investors, such as mutual funds or pension funds, commit to purchasing the issue of stocks or bonds before it actually hits the market. In this sense, investment banks are intermediaries between the issuers of securities and the investing public. In practice, several investment banks will buy the new issue of securities from the issuing company for a negotiated price and promotes the securities to investors in a process called a roadshow. The company walks away with this new supply of capital, while the investment banks form a syndicate (group of banks) and resell the issue to their customer base (mainly institutional investors) and the investing public.

43. Investment bank services: acting as the client's agent in the issuance of securities.

An investment bank is a financial institution that assists wealthy individuals, corporations, and governments in raising capital by underwriting and/or acting as the client’s agent in the issuance of securities. 

Investment banks play a key role in the issuance of new corporate and state and local government securities. However they also face considerable risks in doing so. Investment bankers typically provide one or more of the following services for the entity issuing new securities:

• Advice on the timing, issue price, volume of securities offered, and other terms,

• Purchase all or some of the securities from the issuer, and

• Resell the securities to the public.

• Investment banks primarily help clients raise money through debt and equity offerings.  This includes raising funds through Initial Public Offerings (IPOs), credit facilities with the bank, selling shares to investors through private placements, or issuing and selling bonds on behalf of the client.

• The investment bank serves as an intermediary between investors and the company and earns revenue through advisory fees.  Clients want to utilize investment banks for their capital raising needs because of the investment bank’s access to investors, expertise in valuation, and experience in bring companies to market.

• Investment banks are often buy shares directly from the company and try to sell at a higher price – a process known as underwriting.  Underwriting is riskier than simply advising clients since the bank assumes the risk of selling the stock for a lower price than expected.  Underwriting an offering requires the division to work with Sales & Trading to sell shares to the public markets.

By underwriting, the investment bank buys all the new securities from the issuer (a company or government) at an agreed upon fee. Thus the issuer is guaranteed a certain minimum amount raised from the issue, while the underwriter bears the risk. The underwriter then resells the new shares directly to the market or to another investor. The underwriter may agree to “support the issue” by buying any shares which are not bought by the public, thus creating public confidence. The profit for the underwriter lies in the difference between the price paid to the issuer and the public offering, which is called the underwriting spread. The first issue of a company's stock to the public is called Initial Public Offering (IPO).