{"id":10230,"date":"2023-07-27T20:59:54","date_gmt":"2023-07-27T15:29:54","guid":{"rendered":"https:\/\/razorpay.com\/blog\/?p=10230"},"modified":"2023-07-28T12:46:17","modified_gmt":"2023-07-28T07:16:17","slug":"investment-banks","status":"publish","type":"post","link":"https:\/\/razorpay.com\/blog\/business-banking\/investment-banks\/","title":{"rendered":"Investment Banking &#8211; Meaning, Functions and More"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">When you need to buy 1 kg of wheat flour, you go to your neighbourhood grocery shop. But when you need to buy 1000 kg of wheat flour for your commercial bakery, you go to the biggest wheat flour wholesaler in the city!<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Similarly, businesses with large, complex financial needs go to the country&#8217;s biggest banks. These banks are called <\/span><b>investment banks.\u00a0<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Let\u2019s take an in-depth look at what an investment bank is, and how businesses benefit from them.\u00a0<\/span><\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_80 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69dd0bfb180e2\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69dd0bfb180e2\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/investment-banks\/#What_is_Investment_Banking\" >What is Investment Banking?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/investment-banks\/#Investment_Banking_Services\" >Investment Banking Services<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/investment-banks\/#Initial_Public_Offering_IPO\" >Initial Public Offering (IPO)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/investment-banks\/#Mergers_and_Acquisitions\" >Mergers and Acquisitions<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/investment-banks\/#How_Do_Investment_Banks_Make_Money\" >How Do Investment Banks Make Money?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/investment-banks\/#FAQs\" >FAQs<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/investment-banks\/#What_do_investment_banks_do\" >What do investment banks do?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/investment-banks\/#What_is_the_difference_between_a_bank_and_an_investment_bank\" >What is the difference between a bank and an investment bank?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/investment-banks\/#What_do_investment_bankers_do\" >What do investment bankers do?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/investment-banks\/#Why_are_investment_bankers_paid_so_well\" >Why are investment bankers paid so well?<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"What_is_Investment_Banking\"><\/span><b>What is Investment Banking?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Investment banking is a branch of banking that organizes and enables large, complex financial transactions for businesses, like mergers, IPOs or underwriting.<\/p>\n<p><span style=\"font-weight: 400;\">Here&#8217;s more detail into the services that investment banks provide to businesses.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Investment_Banking_Services\"><\/span><strong>Investment Banking Services<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<h3><span class=\"ez-toc-section\" id=\"Initial_Public_Offering_IPO\"><\/span><strong>Initial Public Offering (IPO)<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">When a privately-owned business wants to become a publicly traded company, it goes through an <a href=\"https:\/\/razorpay.com\/blog\/business-banking\/ipo-all-about-initial-public-offering\/\">IPO<\/a>, or Initial Public Offering.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Investment Banks help businesses plan and strategize their IPO to ensure success. How do they do this? <\/span><span style=\"font-weight: 400;\">Let\u2019s understand with an example.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Meena wants to take her fashion business public. She wants to raise at least Rs 10 lakh in her IPO. <\/span><span style=\"font-weight: 400;\">To do this, she approaches ABC Investment Bank. ABC conducts intensive research and study into the market and informs Meena that the value of her business is Rs 2 per share. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">This means that to raise the capital she needs, she would have to issue 5 lakh shares to the public. But g<\/span>oing public is risky &#8211; if the public does not respond as well as expected, the business could face huge losses.<\/p>\n<p>ABC Bank will help Meena negate some of this risk by buying up a portion of her shares and then reselling them to the public. This is called\u00a0<strong>underwriting.\u00a0<\/strong><\/p>\n<p>Underwriting is the process of assessing financial risk and committing to purchasing the shares from the issuing company to ensure the successful sale and distribution of the newly offered securities to investors.<\/p>\n<p>Let&#8217;s say ABC Investment Bank agrees to underwrite 1 lakh shares out of the total 5 lakh shares that Meena&#8217;s business is offering. This means that Meena&#8217;s business is guaranteed to raise a total of Rs 2 lakh, even if the IPO fails.<\/p>\n<p>In most cases, more than one bank underwrites a business&#8217;s shares to reduce risk as much as possible.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Mergers_and_Acquisitions\"><\/span>Mergers and Acquisitions<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Investment Banks also help businesses with big mergers and acquisitions of other businesses. There is a lot of complex financial planning to be done when two businesses are about to strike a deal.<\/p>\n<p>Investment Banks help businesses with valuations, deal negotiations, and more.<\/p>\n<p>Let&#8217;s continue with the example of Meena&#8217;s fashion business!<\/p>\n<p>Now that Meena has taken her business live with ABC Investment Bank, she has significantly upsized her company and now has a good amount of cash.<\/p>\n<p>She wants to put this cash to good use, so she decides to acquire Daniel&#8217;s footwear business.<\/p>\n<p>Meena once again goes to ABC Investment Bank and tells them of her interest in acquiring Daniel&#8217;s business.<\/p>\n<p>ABC Investment Bank will analyze Daniel&#8217;s business, consult with industry experts and advise Meena on whether this would be a good deal for her or not.<\/p>\n<p>ABC will also help Meena value Daniel&#8217;s business and come up with a <strong>purchase value<\/strong> &#8211; the amount that Meena will pay to buy Daniel&#8217;s business.<\/p>\n<p>If Daniel wants a better price for his business, ABC will help Meena decide whether the higher price is worth it or not.<\/p>\n<p>Once Daniel and Meena have agreed on a price, ABC Investment Bank will help Meena with the terms and conditions of the deal. It will also help Meena integrate the newly acquired business into her company in the most efficient way possible.<\/p>\n<p>These functions seem very expensive, and they are! Investment Banking is a very profitable business, being one of the most highly paid careers in the world. But how do investment bankers make money?<\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_Do_Investment_Banks_Make_Money\"><\/span>How Do Investment Banks Make Money?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>When an Investment Bank decides to underwrite an IPO, it usually sells the shares at a higher price.<\/p>\n<p>In Meena&#8217;s example, ABC Investment Bank bought 1 lakh shares from Meena at Rs 2 per share. When ABC Bank sells those shares on the market, it might sell them at Rs 3.5 per share. This means ABC stands to make a profit of Rs 1.5 per share!<\/p>\n<p>Investment Banks also charge a fee for services provided like valuing the business that is about to go public or in Mergers and Acquisitions.<\/p>\n<p>There are a lot of other ways that investment banks make money, like <a href=\"https:\/\/razorpay.com\/blog\/business-banking\/importance-of-asset-management\/\">Asset Managem<\/a><a href=\"https:\/\/razorpay.com\/blog\/business-banking\/importance-of-asset-management\/\">ent<\/a> and proprietary trading.<\/p>\n<p>Do you want the best bank for your business?<\/p>\n<p>RazorpayX is a full-stack financial management suite designed for Indian startups. You get everything your business needs, all in one place! Payroll, vendor payments, corporate credit cards, smart dashboards and so much more.<\/p>\n<p>We&#8217;re in the future. It&#8217;s up to you to make sure your business is, too!<\/p>\n<div style=\"text-align: center;\"><a style=\"border-radius: 3px; background: #528FF0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/razorpay.com\/x\/?r=blog_cta_business_banking_investment_banking&amp;utm_source=blog&amp;utm_medium=cta\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\">Check out RazorpayX!<\/a><\/div>\n<h2><span class=\"ez-toc-section\" id=\"FAQs\"><\/span>FAQs<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<div id=\"rank-math-rich-snippet-wrapper\"><div id=\"rank-math-faq\" class=\"rank-math-block\">\n<div class=\"rank-math-list \">\n<div id=\"faq-1\" class=\"rank-math-list-item\">\n<h3 class=\"rank-math-question \"><span class=\"ez-toc-section\" id=\"What_do_investment_banks_do\"><\/span>What do investment banks do?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<div class=\"rank-math-answer \">\n\n<p>Investment banks help business with complex financial transactions like IPOS and mergers &amp; acquisitions. <\/p>\n\n<\/div>\n<\/div>\n<div id=\"faq-2\" class=\"rank-math-list-item\">\n<h3 class=\"rank-math-question \"><span class=\"ez-toc-section\" id=\"What_is_the_difference_between_a_bank_and_an_investment_bank\"><\/span>What is the difference between a bank and an investment bank?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<div class=\"rank-math-answer \">\n\n<p>An investment bank specifically serves the complex needs of businesses and large corporations like IPOs and M&amp;As. Regular retail banks serve the needs of individuals by providing savings accounts, FDs and RDs. <\/p>\n\n<\/div>\n<\/div>\n<div id=\"faq-3\" class=\"rank-math-list-item\">\n<h3 class=\"rank-math-question \"><span class=\"ez-toc-section\" id=\"What_do_investment_bankers_do\"><\/span>What do investment bankers do?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<div class=\"rank-math-answer \">\n\n<p>Investment Bankers work for investment banks. They have in-depth industry knowledge and are able to help businesses with valuations, investments and more. <\/p>\n\n<\/div>\n<\/div>\n<div id=\"faq-4\" class=\"rank-math-list-item\">\n<h3 class=\"rank-math-question \"><span class=\"ez-toc-section\" id=\"Why_are_investment_bankers_paid_so_well\"><\/span>Why are investment bankers paid so well?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<div class=\"rank-math-answer \">\n\n<p>Investment Banking is a very lucrative business. This is because without an Investment Bank, large business deals cannot go through. Investment banks charge a fee for their services and are able to pay their investment bankers high salaries. <\/p>\n\n<\/div>\n<\/div>\n<\/div>\n<\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>When you need to buy 1 kg of wheat flour, you go to your neighbourhood grocery shop. But when you need to buy 1000 kg of wheat flour for your commercial bakery, you go to the biggest wheat flour wholesaler in the city! Similarly, businesses with large, complex financial needs go to the country&#8217;s biggest<\/p>\n","protected":false},"author":106,"featured_media":10233,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[27],"tags":[375],"class_list":{"0":"post-10230","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-business-banking","8":"tag-investment-banking"},"_links":{"self":[{"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/posts\/10230","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/users\/106"}],"replies":[{"embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/comments?post=10230"}],"version-history":[{"count":0,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/posts\/10230\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/media\/10233"}],"wp:attachment":[{"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/media?parent=10230"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/categories?post=10230"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/tags?post=10230"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}