Investment banker is an institution that acts as an underwriter for corporations, but which does not accept deposits or make loans. Investment bankers are an important part of the business world. Their main objective is to help companies, both private and public, raise capital through several different means. One way is through equity financing where a company sells part ownership in the company to the public.
This is typically done through and IPO where the shares are first introduced to investors. Another type of financing is knows as debt financing. Through debt financing, a company literally borrows money from investors via the selling of bonds. The company must repay the full amount borrowed, when the bond matures, along with the interest that was agreed upon when the bond was issued. Investment bankers can also be advisors to a company when dealing with different types of transactions such as mergers and aquisitions.
When a company uses an investment bank, the bank is responsible for preparing all the materials needed for the transaction and the completion of the deal. Bottom line, an investment banker can make the process of raising capital much easier for a company.
There are several different ways an investment banker can sell securities for a company:
- Firm Commitment- The investment banker will actually buy the securities from the company at an agreed upon price and then resell them to the public at a markup. The investment bank takes the risk here but can benefit substantially if the securities are highly revered by the public.
- Best Efforts- The investment banker will agree to do their best to sell all of the securities, but does not guarantee it. The company takes the risk here since they will not receive as much capital if all the securities are not sold.