The investment bankers Distribution

The investment bankers distribute the issue to many investors. To sell the issue quickly, a syndicate of many firms is formed for each issue, and the securities are distributed through a large network reaching many potential investors, as illustrated in Figure 13-2. Firms in the syndicate sell the new issue as an alternative to existing securities that they buy and sell. For example, Big Apple offers its customers XYZ stock, as well as General Motors stock. To sweeten the offer, the new issue is priced slightly below its going market price. The new issue discount is an important incentive to customers and allows investment bankers to distribute a new issue quickly. The investment bankers want to sell their inventory of underwritten securities so that they can arrange more new issues. A high volume of new issues is the key to investment banking success, because fees are based on the volume of securities sold. Ideally, the investment banker can sell a new issue within a few days after it is underwritten.

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INVESTMENT BANKING Underwriting

Investment banking firms often purchase a new issue or guarantee its sale at a specified price. The investment banking firm underwrites the new issue when it assumes the marketing risk. If the security is not sold to investors at the offering price, then the underwriter incurs the loss. For example, XYZ corporation may agree to sell its new stock offering to Big Apple Investment Bankers, Inc., at $20 per share for 1 million shares. Big Apple assumes the risk of selling the stock at $20 or more per share. If XYZ’s stock value falls to $19 per share, then Big Apple suffers a loss of $1 per share of $1 million. Underwriting is important to the issuer because it guarantees the amount of money that will be raised by the security issue.

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INVESTMENT Ignition

Ignition
Security flotation are complex matter, and security issuers look to the investment banker for specialized assistance during origination. Origination is the function of providing issuers investment advice, information, and distance. The investment banker commonly:
1.     Advises the issuer on the type of security and specific terms that are most septable during current financial market conditions.
2.    Prepares and assists in filing a prospectus with the Securities and Exchange Commission.
3.    Arrangers for the efficient distribution of the new issue.
4.    Arranges for a number of operational requirements such as trustees, urity indentures (contracts), and safekeeping.
5.    Uses frequently depend heavily upon investment bankers who are financial market specialists to create securities that meet most of the issuer’s needs and simultaneously, are acceptable for sale to investors. See Figure 213-1 for a depiction of the process.
On the other hand, the investment banker may agree to either (1) a standby agreement or (2) a best-efforts agreement. Standby agreements are commonly used in the case of rights offerings and commit the investment banker to purchase all securities not bought by current stockholders; under the terms of rights offerings, present stockholders are given the privilege of purchasing new stock in proportion to their current ownership before it is offered to other investors. When new stock is sold without rights, then the investment banker may attempt to sell the issue on a best-efforts basis. Investment bankers act as agents and utilizes their best efforts to sell the securities, but the firm or syndicate is not committed to sell the issue. Securities not sold under a best efforts basis remain unissued. Investment bankers guarantee the sale of securities only under firm underwriting and standby agreements.

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INVESTMENT BANKING AND SECURITIES TRADING

Investment banking is defined generally as follows:
….. the intermediary activities carried on by securities firms and commercial banks in the sale of new securities. New issues except where otherwise indicated are defined to exclude U.S. government securities and mutual fund shares that do not go through the usual investment banking channels, and to include those secondaries which do.
This part of the chapter discusses investment banking and the related acuity of securities trading. The basic difference between investment banking securities trading is that investment banking is concerned primarily with issues, whereas securities trading relates to existing securities. For exam, Merrill Lynch is acting as an investment banker when it sells a new issue of American Telephone and Telegraph (ATT&T) common stock, but it is a societies trader when it participates in the exchange of existing AT&T common ck. Some investment firms, such as Merrill Lynch, Salomon Brothers, and an Witter Reynolds, perform both investment banking and securities trading actions, while other, smaller firms specialize in one function.
Investment bankers perform several important functions to bring new seities to the investing public. The three major functions of investment bank are (1) originations, (2) underwriting, and (3) distribution. New securities are ated during origination, bought by investment bankers during underwriting  , I sold to investors during the distribution phase.

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INVESTMENT BANKING, SECURITY TRADING, AND MORTGAGE BANKING

This describes intermediaries that own relatively few assets but transact a tremendous volume of securities. Investment bankers market new stock and bond offerings to individual and institutional investors around the world. Security dealers trade existing securities among millions of investors, both individual and institutional. Mortgage bankers grant billions of dollars worth of mortgages for quick resale to institutional investors but act primarily as marketers and retain few securities permanently. These intermediaries contribute their expertise and facilities toward helping individuals, business, and governments bring new security issues to the money and capital markets and to exchange existing securities.
    As with other intermediaries described previously, these intermediaries are frequently owned by holding companies that own other types of financial intermediaries. Further, many of the functions described in this chapter are actually performed by institutions other than those designated as investment bankers, security dealers, and mortgage bankers. For example, some commercial banks are taking orders for security transactions from their customers and some savings and loans perform all of the functions attributed to mortgage bankers. Product-line distinctions, once an easy means of classifying institutions, are blurring in today’s rush to open financial supermarkets. To avoid the seeming confusion in financial institution structure, we focus not on corporate structures buy on the basic financial services that satisfy society’s needs for financial intermediation. In this chapter we concentrate on the needs of individuals and businesses to issue financial contracts (securities and mortgages) that can be traded in public capital markets.

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