When a company decides to sell new securities to raise funds, this offering is referred to as a primary issue. An investment banker is the agent responsible for locating buyers for the securities. He or she represents an investment banking company. The investment bank first buys the primary issue from a corporation before arranging for an instantaneous resale of the securities to investors. In general, the investment bank carries out three main functions, which are analysis, investigation and research, underwriting and distribution. The firm can choose to perform all functions or focus on a specific task.
Analysis, investigation and research
This step involves the subsidiary operations such as discovery, negotiation and investigation. The main aim of analysis and investigation is to determine whether a specified issue has adequate merit to be presented to an investment community. This means, the investment banker has the responsibility of analyzing carefully the reliability and soundness of the company whose securities want the investment market. Normally, investigation involves a thorough analysis of financial history of the company in question by accountants, a survey by engineers of its physical property, a deep review of its operation and investigation of any legal factors.
Public cash offering
This process is also known as underwriting. When a company decides to sell securities to the public, it comes to an arrangement with an investment firm where the investment banking company buys the entire issue at a defined price, which is known as underwriting. Additionally, underwriting also means that the investment-banking firm will assure the corporation of a certain minimum price for the new securities. The compensation for the underwriter is the difference between the price it sold the securities to the public and the cash it paid to the corporation.
One of the main functions of an investment-banking firm is to market equity or the security issues. In this role, the firm acts as a distribution agent distributing securities for the corporation effectively. If an organization tries to sell an issue on its own, it is usually ineffective and very costly. An investment banker on the other hand has an already established sales and marketing network for distributing securities. The advantage of security bankers is that they offer security to both the company issuing the securities and the investors who buy these securities. The corporation also does not spend resources it does not have nor does it run the risks of the market uncertainties.