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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. |
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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. |
| Other
Services:
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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