Capital Markets and Investment Banking Process
Capital Markets and Investment Banking Process
Capital Markets and Investment Banking Process The investment environment is vast and can be overwhelming if not entered into correctly. Firm’s issuing new securities to enhance revenues understand the complexities and risks involved when entering the primary market, and will employ investment bankers to mitigate those risks. Described throughout this paper is the investment banking process and portfolio construction, factors for selecting the portfolio asset classes, the capital market instruments used in portfolio construction, and recommendations for the composition of an investment portfolio.
Investment Banking Process and Portfolio Construction Investment bankers work with firms issuing new securities as both an advisor and intermediary in setting security prices, interest rates, and marketing the new securities for sale in the primary market (Bodie, Kane, & Marcus, 2008). The primary market is where firms are able to sell their new securities and obtain funds that are needed to increase their capital base. Firms issuing new securities are strategically working to raise funds; however, there is a potential risk that all the newly issued securities will not sell and the strategy to raise funds could fail. To mitigate this potential risk firms hire an investment banker as an underwriter. As an underwriter the investment banker assumes the risks by purchasing the firms new securities at a fixed price lower than the offering price to the public, and then sells the securities at the current market price for a profit (Hirt & Block, 2008). “With underwriting, once the security is sold, the investment banker will usually make a market in the security, which means active buying and selling to ensure a continuously liquid market and wider distribution” (Hirt & Block, 2008, P. 27). After the investment banker has sold the new securities issued by a firm in the primary market, those securities then become
Capital Markets and Investment Banking Process The investment environment is vast and can be overwhelming if not entered into correctly. Firm’s issuing new securities to enhance revenues understand the complexities and risks involved when entering the primary market, and will employ investment bankers to mitigate those risks. Described throughout this paper is the investment banking process and portfolio construction, factors for selecting the portfolio asset classes, the capital market instruments used in portfolio construction, and recommendations for the composition of an investment portfolio.
Investment Banking Process and Portfolio Construction Investment bankers work with firms issuing new securities as both an advisor and intermediary in setting security prices, interest rates, and marketing the new securities for sale in the primary market (Bodie, Kane, & Marcus, 2008). The primary market is where firms are able to sell their new securities and obtain funds that are needed to increase their capital base. Firms issuing new securities are strategically working to raise funds; however, there is a potential risk that all the newly issued securities will not sell and the strategy to raise funds could fail. To mitigate this potential risk firms hire an investment banker as an underwriter. As an underwriter the investment banker assumes the risks by purchasing the firms new securities at a fixed price lower than the offering price to the public, and then sells the securities at the current market price for a profit (Hirt & Block, 2008). “With underwriting, once the security is sold, the investment banker will usually make a market in the security, which means active buying and selling to ensure a continuously liquid market and wider distribution” (Hirt & Block, 2008, P. 27). After the investment banker has sold the new securities issued by a firm in the primary market, those securities then become
References: Bodie, Z., Kane, A., & Marcus, A. J. (2008). Essentials of Investments (7th ed.). New York, NY: McGraw-Hill/Irwin. Hirt, G. A., & Block, S. B. (2008). Fundamentals of investment management (9th ed.). New York, NY: McGraw-Hill/Irwin. Investor Guide. (2010). Understanding asset allocation while building a portfolio. Retrieved from http://www.investorguide.com/igu-article-541-asset-allocation-understanding-asset-allocation-while-building-a-portfolio.html Maps of World Finance. (2009). Capital market instruments. Retrieved from http://finance.mapsofworld.com/capital-market/instruments.html