What do investment banks do? Why are they such important players in the equity markets

What do investment banks do? It is a question worth considering as they are very big, and are very important to equity markets. In the economy generally, they act as intermediaries that help companies, governments, and other entities raise capital, manage risk, and execute various financial transactions. But let’s look at what they do in relation to stocks.

What do investment banks do for listed companies?

There are 4 main things investment banks do for listed companies. This is not meant to be an exhaustive list, but these are the most important that investors in listed stocks need to know about. The first is transacting shares in companies. Investment banks help companies go public in the first place by issuing shares of stock to the public for the first time. They determine the price, manage the sale, and provide advice throughout the process.

They can also help with secondary raisings of capital (i.e. placements or rights issues) as well as facilitate block trades when major shareholders want to sell. Could you imagine shareholders with tens of millions of dollars in shares using CommSec or Stake? No, they use the banks to ensure the trades go through. They also can help companies or governments raise money by issuing bonds or other debt instruments. Investment banks assist in structuring these deals, finding buyers, and managing the pricing of the debt.

Secondly, investment banks advise listed companies on transactions such as mergers, acquisitions, and divestitures. They help negotiate terms, structure deals, and provide strategic advice. When a company is facing financial difficulty, investment banks may help restructure debt, renegotiate terms with creditors, or help the company reorganise its business.

Thirdly some investment banks engage in proprietary trading, where they use their own capital to buy and sell stocks, bonds, and other securities in an attempt to profit from market movements. This is a high-risk strategy, though, and many banks have reduced or eliminated proprietary trading due to regulatory changes.

Fourth, banks offer research and recommendations about which stocks to buy or sell. employ equity research analysts who analyse companies’ financials, industry trends, and the overall market. These analysts provide reports that help investors (both individual and institutional) decide which stocks to buy or sell. The research also helps the bank’s own traders and clients make informed decisions.

Here’s a little secret: Barring big names like the banks and miners, they tend to only cover companies that have engaged them in the past, or hope will engage them in the future – that is, unless they have put a sell rating on them. Single notes out of banks can cause shares to take a plunge. Just look at the recent example of GQG’s fall after UBS put a figure on just how much money had gone out of its coffers as it was punished for its bet on Adani.

Who are some of the most famous investment banks?

The so-called ‘bulge bracket banks’ include: Bank of America, Barclays, Citi, Deutsche Bank, Goldman Sachs, JP Morgan, Morgan Stanley, UBS and BNP Paribas. All of these have offices in Australia.

Some of the biggest based in Australia, major players here but not so much on global stock markets (even if they have private assets globally) include Macquarie, MA Australia, Jarden, RBC Capital Markets and Barrenjoey. The latter company only started in 2020 and has grown to be a major player.

It is important to note that entities like Regal, Wilson and AEF are not investment banks, they are money managers because that is all they do. These companies make up the ‘buy side’ because they’ll be buying from the banks.

Conclusion

In short, investment banks play an important role in the market by helping companies raise capital through various means, providing research, corporate advice and sometimes even stock trading. Those are the main functions that investors need to know about. Love them or hate them, they’re here to stay.

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