How to Explain Investment Banking to a Layman

Many organizations and companies get funds by selling of securities. Investment banks often offer the expertise and client base required to sell these securities. While companies do not need to utilize investment banks, they usually do so because they tend to be much less costly than directly selling these securities to the public. This article will concentrate on some of the most popular aspects of investment banking. It is not an exhaustive overview of the business. We will look at the structure and costs of transactions and how to best explain them to a layman.

Financial advisory services

It is crucial to explain investment banking to laymen. As a rule investment banking is the department of a financial institution that provides services to institutions, corporations as well as government entities. These banks offer services in the area of investment banking, including advice and underwriting in mergers and acquisitions. They act as intermediaries between companies and investors. Their lack of experience could hinder a layperson's understanding of investment banking.

Underwriting

You can explain investment banking underwriting to a layperson in three steps that are planning, assessment of demand and the issuance. The first step is to analyze the investment themes. Banks that invest in investment also use underwriting to assess the demand for a certain issue. There are two types of commitments: best efforts and all or nothing. The underwriter will market the issue with the utmost effort however they will not be held financially responsible if any component isn't sold. All-or-none commitments on the contrary will require the underwriter to sell the entire issue.

Structure of transactions

The enterprise value of a business is often used to calculate a success charge. The banker is supposed to be compensated for the sale of the entire business. Success fees are only beneficial when the banker is able to achieve a higher price than the company. An example: An investment bank might be paid for helping a seller achieve an amount of $155 million when their client is sold at $200 million.

Costs

The costs of investment banking differ from one firm to the next and deal to deal. However, the basic principles of investment banking remain the same. The larger the deal, the more time and money the investment banker needs to complete it. Deals with a value of more than $20 million tend to be more expensive on the basis of dollar-for-dollar. Smaller deals, however, generally have lower fees and require less surrender. Capital raises usually have the highest cost. There are ways to cut down on the overall cost of investment banking.

Risks

Investment banking involves many different securities from various countries and markets. It is therefore a complex business that requires a comprehensive approach to managing the risks. There are risks associated with investment banking at macro or industrial levels. Below are some of the most common risks that could arise within the world of investment banking. Learn more about them and ways to reduce the risks. This information will allow you to make informed decisions about how to address the risks in your business. Click here