Capital Markets And Investment Banking

Topics: Investment, Underwriting, Bond Pages: 5 (766 words) Published: November 23, 2014


Capital Markets and Investment Banking Process Paper
Carmen Yost
October 28th 2014
FIN 402
Edward David

Capital Markets and Investment Banking Process Paper
Investment banks provide a huge amount of crucial services to the economy. The first important role of investment bank is to help the public and help private corporations in raising funds for the capital markets. A second service is to provide strategic advisory services for mergers. These institutions also act as intermediaries in trading for customers. Investment banks are different then commercial banks. They take deposits and make commercial and retail loans. The main take away from this paper will be to see how the investment banking process works, including the function of portfolio construction. Investment banking process and capital markets are two different elements in understanding how to invest and be successful in investments. In the investment backing process, an investor might get help from an investment banker, which can help the investor with buying, selling, and trading of securities, managing assets and give financial advice. To make sure asset allocation, diversification, and investment performance is being achieved for increase return, the portfolio construction should be examined. You must understand capital markets, as an investor, so that it can give a better understanding on how and where investments are being processed. The investment banking process starts with creating a portfolio also known as the investor’s portfolio. The investor would need to review, update, buy, and sell as need to keep the portfolio in order to meet the investor’s needs and goals. The investor would need to make decision of how to apply asset allocation to the portfolio. Asset Allocation is “allocation of an investment portfolio across broad asset classes” (Bodie, Kane, & Marcs, 2008, p. 10). When starting the asset allocation process, the investor will have to decide on which asset classes to invest in. These can range from bonds, stocks, and mutual funds, etc. When the investor decides on which asset allocation, they are looking for and which asset class path the portfolio should take; the investor would need to choose a security to invest in. A security selection is a “choice of specific securities within each asset class” (Bodie, Kane, & Marcs, 2008, p. 10), such as an investor deciding to purchase stock in Microsoft or Apple. The investor should do an analysis on the securities in order for them to make an informed and solid decision on their choices. This will include reviewing the securities performances and evaluation. They will also would need to evaluate the risk-return trade-off.

Part of the investment banking process is to help businesses raise funds through the initial public offering (IPO). The company can select an investment bank that will strictly for the underwriting process. Underwriters analyze and asses companies past, current and future earning potential, industry stability, competition in the industry, and the market local and global to determine the issue of price. They also have complete the mandatory documentation that is regulated. They will also charge a fee for their services, which can be paid in a percentage of the IPO. In order to understand the investment bank and their roles it is important to know the difference between what is known as the primary and secondary markets. Secondary markets are defined as "markets for existing assets that are currently traded between investors" (Hirt and Block, 2006). The secondary markets are extremely important because they create the prices and provide liquidity. In order for investors to have a way to sell their assets to eliminate liquidity, they have to have a secondary market. "Primary markets are distinguished by the flow of funds between the market participants" (Hirt and Block, 2006). People that are in the primary market will buy their assets directly from...

References: Bodie, Zvi, Alex Kane, and Alan J. Marcus, 2008, Investments (Irwin McGraw-Hill: Chicago).
Hirt, Geoffrey and Stanley Block. 2006. Fundamentals of Investment Management, 8th Edition, New York: McGraw-Hill Companies.
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