Difference between offer for sale and private placement
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Q For those interested in a Wall Street career, there are a number of roles that could be of interest, including trader, analyst, and investment banker. Many want to be investment bankers, drawn by the high-profile and handsome salaries these jobs offer. So what do investment bankers do?
What Investment Bankers Do
Essentially, investment bankers are corporate financial advisors.
Wall Street attracted the ire of the world following the 2007-08 financial crisis, and its role in the crisis led to greater scrutiny and regulation for the financial sector. The crisis, which came to a head after investment bank Lehman Brothers filed for bankruptcy in September 2008, exposed the underbelly of Wall Street.
But even though the luster of being a so-called Wall Street master of the universe has been tarnished somewhat as a result, careers on Wall Street still remain a draw for top graduates.
The Role of the Investment Banker
The investment banker acts in a capital markets advisory capacity to corporations and governments, rather than dealing directly with individual investors. Investment bankers help their clients raise money in the capital markets, provide various financial advisory services, and assist with mergers and acquisition activity.
Thus, when the capital markets are doing well, investment bankers tend to do well since they can generate more revenues from all the activities that they undertake.
1:40
The Top 5 Skills an Investment Banker Needs
Arranging Finance
If a large company wants to build a factory and is looking to issue bond financing to finance its expansion, it may seek the help of an investment banker. Similarly, if a government wants to finance the building of an airport, highway or other large municipal project, it may work with an investment banker to issue bonds to raise capital.
In such a case, the investment banker would plan the bond issuance, price the bond issuance so that there is enough demand for the bonds, work with the issuer to manage the U.S. Securities and Exchange Commission (SEC) documentation required to issue the bonds, and help sell the bonds.
The investment banker also plays a role when it comes to arranging equity financing. Suppose a company decides it needs more money to grow and decides to raise the funds by going in for an initial public offering, or IPO. An investment banker would put together a prospectus explaining the terms of the offering and the risks it carries, manage the issuance process with the SEC, and help price the offering. The shares should be priced just right. If they are priced too high, the public may not be interested in buying them. If they are priced too low, the investment banker may be leaving some money on the table that he or she could have generated for the client.
Underwriting Deals
In the course of arranging capital markets financing for its clients, investment bankers also typically undertake the underwriting of the deals. This means that they manage the risk inherent in the process by buying the securities from the issuers and selling them to the public or institutional buyers. Investment bankers buy the securities at one price and then add on a markup in the sale price and thereby generate a profit that compensates for the risk they take on. This spread is the underwriting spread. Typically, a lead investment banker works with a group of investment bankers, called a syndicate, to underwrite an issue so that the risk is spread out among them.
Sometimes, the underwriter merely acts as a go-between in marketing the deals and puts in a best effort to market the securities, but does not take on the underwriting risk. In this case, the investment bankers have the option to sell securities and get paid, on a commission basis, for the actual amount of securities they sell.
Private Placements
Instead of taking on the cost of a public offering, sometimes investment bankers help their clients raise capital through private placements. For instance, they could place an offering
What Investment Bankers Do
Essentially, investment bankers are corporate financial advisors.
Wall Street attracted the ire of the world following the 2007-08 financial crisis, and its role in the crisis led to greater scrutiny and regulation for the financial sector. The crisis, which came to a head after investment bank Lehman Brothers filed for bankruptcy in September 2008, exposed the underbelly of Wall Street.
But even though the luster of being a so-called Wall Street master of the universe has been tarnished somewhat as a result, careers on Wall Street still remain a draw for top graduates.
The Role of the Investment Banker
The investment banker acts in a capital markets advisory capacity to corporations and governments, rather than dealing directly with individual investors. Investment bankers help their clients raise money in the capital markets, provide various financial advisory services, and assist with mergers and acquisition activity.
Thus, when the capital markets are doing well, investment bankers tend to do well since they can generate more revenues from all the activities that they undertake.
1:40
The Top 5 Skills an Investment Banker Needs
Arranging Finance
If a large company wants to build a factory and is looking to issue bond financing to finance its expansion, it may seek the help of an investment banker. Similarly, if a government wants to finance the building of an airport, highway or other large municipal project, it may work with an investment banker to issue bonds to raise capital.
In such a case, the investment banker would plan the bond issuance, price the bond issuance so that there is enough demand for the bonds, work with the issuer to manage the U.S. Securities and Exchange Commission (SEC) documentation required to issue the bonds, and help sell the bonds.
The investment banker also plays a role when it comes to arranging equity financing. Suppose a company decides it needs more money to grow and decides to raise the funds by going in for an initial public offering, or IPO. An investment banker would put together a prospectus explaining the terms of the offering and the risks it carries, manage the issuance process with the SEC, and help price the offering. The shares should be priced just right. If they are priced too high, the public may not be interested in buying them. If they are priced too low, the investment banker may be leaving some money on the table that he or she could have generated for the client.
Underwriting Deals
In the course of arranging capital markets financing for its clients, investment bankers also typically undertake the underwriting of the deals. This means that they manage the risk inherent in the process by buying the securities from the issuers and selling them to the public or institutional buyers. Investment bankers buy the securities at one price and then add on a markup in the sale price and thereby generate a profit that compensates for the risk they take on. This spread is the underwriting spread. Typically, a lead investment banker works with a group of investment bankers, called a syndicate, to underwrite an issue so that the risk is spread out among them.
Sometimes, the underwriter merely acts as a go-between in marketing the deals and puts in a best effort to market the securities, but does not take on the underwriting risk. In this case, the investment bankers have the option to sell securities and get paid, on a commission basis, for the actual amount of securities they sell.
Private Placements
Instead of taking on the cost of a public offering, sometimes investment bankers help their clients raise capital through private placements. For instance, they could place an offering
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