Operation of the Investment Banks:
Investment banks perform a major role in the very important function of raising long-term capital for corporations. Such banks are also sometimes called "Security Houses". Investment banks specialise in the marketing of new issues of common preferred stocks and bonds of old and new companies. Investment banks sell them to the general public or to pension funds; insurance companies or other large investing institutions. These are banks, which provide capital for industry usually for ling period purposes of production, in return taking over shares in the borrowing companies. What they actually do is to "Under-write" a corporation's new security issues.
In the other words, security houses guarantee the sale of a company's securities and deliver a check to it for these new securities. They make their profit by charging a commission, which may vary from 3% to 10% or more of the proceeds of the sale.
Investment banks would make an investigation of the company prior to making any commitment regarding the proposed bond issue. The final agreement to under-writer is usually not signed until a day or two before the securities are put on the market. The price that the investment bank would be willing to pay would depend on the amount that it anticipates can be realised from the sale of securities.
Additionally, an investment bank may exercise many merchant bank functions such as merger making, commodity trading, advising on investments, counseling in corporate finance, broking etc.
Importance of Investment Banks:
Investment Banks perform a major role in the very important function of raising long-term capital for corporations. The importance of the need of capital funds by a corporation cannot be denied. For this, a company may decide to authorize an issue of shares and bonds. The problem now of selling these securities to the public would loom as almost in surmountable to a company unversed in this field of finance. The distribution of any important volume of stock or bonds requires the services of specialists who have the offices and sales personnel to handle it. Their function is similar to that of a departmental store, which buys goods from manufacturers and sells them to customers.
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