Investment banking:

Sometimes a distinction is made between financial intermediation on the one hand, and direct financing through financial markets. In this suggested dichotomy, the exchange of funds between savers and investors is accomplished either by a direct exchange of credit between borrowers and lenders or by an indirect exchange through a financial institution. This dichotomy can be misleading because those organisations and firms issuing securities (raising capital) almost invariably make use of the services of financial intermediaries like investment banks, merchant banks, and brokers. We study precisely this function of investment banking in this Unit: how they help in the capital acquisition process for those who need these, and how they perform underwriting operations, how optimal underwriting contracts are arrived at.

In this section we look at the nature of investment banking and the role they play in capital markets. Investment banking firms (for these banks are firms) perform a critical role in the primary as well as secondary markets for securities. Investment banking firms perform two important functions. First investment banks helps companies that need funds to raise these funds. Secondly, for investors who need to invest funds, investment banks act as brokers or dealers in the buying or selling of securities.Financial Institutions 30 Our objective in this Unit is to see how investment banks act as financial intermediaries.

We will see in the next section how investment banking aids in the capital accumulation process. In the following two sections, the Unit discusses public offerings - mainly in the primary market, and costs that are associated with these offerings. The final section of the main body of the unit discusses the consequences of the over- subscription and/or the under-pricing of IPOs.