Week 1

Week 1
 What is an Investment ?
An investment is an item or monetary asset acquired with the intention of
generating income or appreciation. Appreciation refers to an increase in
the value of an asset over time. When an individual purchases a good as
an investment, the intent is not to consume the good but rather to use it in
the future to create wealth. An investment always concerns the outlay of
some asset today time, money, or effort in hopes of a greater payoff in the
future than what was originally put in.
 Investment Banking is the division of bank or a separate corporate

financial institution that serves governments, corporations and institutions
by providing various financial services such as Underwriting (means
capital raising), Merger and acquisitions (M&A Advisory) services.
Investment Banks serve as intermediaries between investors, people with
money to invest and institutions, who require money to grow and expand
their business.
 There are basically 2 types of financial banking institutions,

1. Commercial Banks
2. Investment Banks
Commercial Banks
It is a financial institution which services the general public by
accepting deposits from them and they give loans to the general public
with the aim of earning profit. They are profit seeking institutions.
They generally finance trade and commerce with short term loans with
relatively high interest rates from the customer but pay much less rates
of interest themselves to their depositors with the result that the
difference between both the rates becomes their main way of earning
profit for these institutions.
(Current Interest – Interest Expense = Spread)
This term “Spread” is the profits earned by these institutions
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Functions of commercial
 Accepts Deposits
 Provides Loan and Advances
 Credit cash
 OverDraft facility
 Locker facility
Examples of Commercial banks – State Bank of india(SBI), HDFC,
ICICI Bank
Investment Bank
Investment Banking is the division of bank or a separate corporate
financial institution that serves governments, corporations and
institutions by providing various financial services such as
Underwriting (means capital raising), Merger and acquisitions (M&A
Advisory) services. Investment Banks serve as intermediaries between
investors, people with money to invest and institutions, who require
money to grow and expand. They Deal with mainly with creation of
capital for other companies, Governments and other corporations.
Investment Banks help corporations and other groups plan and
manage the finances for large projects.
The main activity of these banks is also know as Security
Underwriting. They bought financial securities such as bonds and
stock from an issuer and resold them to an investor. They formed a
bridge between demands and a wanting necessity
In the early days, the first clients of such banks were mainly
governments, where when they needed capital they would sell some of
their debt by creating Bonds and Investment Banks would purchase
some of them from the government, which in turn they would sell to
an investor thus making them middlemen.
Full Fledged Investment Banks provide the Following services
 Security Underwriting
 Merger and Acquisition(M&A) Advisory
 Sales and trading
 Equity Research
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 Asset Management
Underwriting
It is the process of raising capital through the buy and selling of
stocks and bonds from an institution or government and selling it to
an investor. Eg IPOs(Initial Public Offering)
Investment Bankers markert these companies to various sources for
investment.
There are mainly 3 types of underwriting –
Firm commitment - Here the underwriter(Investment Banks) agrees

to buy the entire issue of stock or bonds (subsidised rate) from the
institution and if he can not sell them assumes full financial
responsibility
Best efforts underwriting – Here the underwriter(Investment

Banks) commits to sell as much shares as it is possible at that given
given rate (offering price) and can return any unsold shares back to
the company without any liability
All or none – if the entire issue cannot be sold be sold at the

offering price, then you have no choice but to either sell all or none
of the shares at whatever price offered.
The Book Building Steps for Underwriting

1. Prospectus with price range
2. Institutional investor commitment at firm price
3. Book of demand (Accounts book)
4. Price set to ensure cleaning
5. Allocation
Mergers & Acquisitions(M&A) advisory
Assisting in negotiations and structuring a Merger or an
complete acquisition of 2 or more companies or institutions.
Investment banks usually represent both the buyer side and the
sell side too.
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A Merger would designate a transaction in which two entities

join forces and form a single new entity
An Acquisition would designate where one company or

institution absorbs another company into itself
There are various types
Horizontal Merger  where one company producing a certain

product, for example an oil refinery converting crude oil to
petroleum, acquires an other oil refinery that is its direct
competition forming a monopoly
Vertical Integration  Where one company producing a certain

product say steel manufacturing acquires a company that is not
its direct competitor but broadens its portfolio and acquires a
company that transports steel instead, thus increasing its
efficiency forming a conglomerate.
Hostile Takeovers & Leveraged Buyouts (LBOs)  When a

takeover doesn’t Have the approval of the existing board of
directors and majority of shareholders
The steps for Merger and Acquisitions Services

1. Acquisition strategy
2. Acquisition criteria
3. Searching for target
4. Acquisition planning
5. Valuing and evaluating
6. Negotiations
7. Due diligence
8. Purchase & sales contract
9. Financing
10. Implementations
Sales and Trading

It refers to that division of the bank that is responsible for
making markets in Stocks, Equity, Bonds and Derivatives
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The sales division works with people and asset mangers, hedge
fund managers, investors, to pitch ideas to buy and sell
securities or derivatives by using an investment banks own
money or using the client’s.
There are two types of trading
1. Proprietary Trading  Trading with own money
They use the banks money to buy securities and they are
sold at a profit on a later date depending on how the market
fluctuates. Investment banks play a very important role in
the liquidity of the financial markets.
2. Brokerage  Buying securities on behalf of clients

Trading and sales account for more than 35% - 50% of the
revenue for pure investment banks
The sales and trading division of a pure investment bank can
also be referred to as the Market of securities division of the
bank
Equity Research
It comes Hand in Hand with the Sales and trading division,
which is a division that buys and sells securities for themselves
or a respective paying client. They are responsible to provide
detailed Insight into a company or institutions well being and
this is then used by the Investment banker to carry out his sale.
There are various investors or private equity firms who use
these services. They use this information on how and where to
allocate funds to invest and evaluate a company for mergers,
acquisitions, IPOs (initial public offering), LBOs (leveraged
Buyouts)
Equity research groups are revenue collectors for an investment
bank
There are basically two types of analysts
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1. A sell-side analyst  a person who builds a financial model

predicting a company’s financial status and engages in
qualitative analysis to study various parameter
He follows a relatively short list of companies that are all in
the same sector. They usually work for brokerages
2. A Buy-side analyst  An individual who basically does the
same job as a sell-side analyst but looks to identify the
greatest performer in the subsequent market in which he is
creating a financial model for. He usually follows a larger
list of companies from various different sectors. They
usually work for funds.
Asset Management
Asset management is about handling client’s investment and

assets. They provide them with strategies and expertise that
will allow them to achieve their financial goals and secure
their futures.
Asset managers are in the job of using money to make more
money. They provide their services and expertise on various
asset aspects such as Stocks, Bonds, Commodities, Real
Estate, Private Equity
The steps taken by asset mangers are as follows :-
Study the clients need  investment strategy  implement

the strategy  Oversee the outcome
The various types of investments made on behalf of clients
1. Stocks
> Small-Cap
> Large-Cap
> Blue chip
> BRIC country stocks
There are different types of stocks that can be included,
depending on the Risk Profile of a client
2. Bonds
> Short maturity
> Long maturity
> Corporate
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> Government
3. Commoditites
4. Real Estate

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Week 1

 Investment Banking is the division of bank or a separate corporate

 There are basically 2 types of financial banking institutions,

There are mainly 3 types of underwriting –

Firm commitment - Here the underwriter(Investment Banks) agrees

Best efforts underwriting – Here the underwriter(Investment

All or none – if the entire issue cannot be sold be sold at the

The Book Building Steps for Underwriting

A Merger would designate a transaction in which two entities

An Acquisition would designate where one company or

There are various types

Horizontal Merger  where one company producing a certain

Vertical Integration  Where one company producing a certain

Hostile Takeovers & Leveraged Buyouts (LBOs)  When a

The steps for Merger and Acquisitions Services

Sales and Trading

2. Brokerage  Buying securities on behalf of clients

1. A sell-side analyst  a person who builds a financial model

Asset management is about handling client’s investment and

Study the clients need  investment strategy  implement

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