måndag 24 oktober 2016

Financial institutes and how they create money (Investment Banks)

Let's continue the journey through different financial institutes and figure out how they make money.
Be sure to check out the other posts in this series:

  • Banks
  • Investment banks
  • Insurance companies
  • This time we focus on investment banks.
    These are not the banks that you come into contact with as a consumer. . Other than advisory services, investment banks do their own trading in the market and earn money that way.


    Investment banks are advisers primarily focus on corporations and help them with mergers and acquisitions. Generating large sums of money to the bank as the transactions are huge and they cut into it on a percentage


    The sales divisions of investment banks are occupied with creating and selling product with the help of underwriting.
    By performing an underwriting, the bank assesses the risks and figures out a price-tag on the product. When bringing a company to the market (initial public offering) they also raise money from investors.

    How do they make money here?

    They act as middle men. They buy up all the stock of the new company prior to introducing it to the market. Then, when the new share goes public they profit on the price difference. I.e. what they bought the stock for prior to going public and the price that they go public with. This can be a very large sum.

    There are a number of products other than new companies that are created by the investment banks. Basically, if you come up with an investment, an investment bank will calculate the risks and give you a price tag for that investment. For an fantastic movie on the subject, you have to see The Big Short.


    Well, the same as for banking in general. Investment banks take calculated risks for profiting. Sometimes on the greater good, other times on the greater stupidity. 
    Is it wise to invest in investment banks? Same as for banks. Maybe, you have to do your own research and find out if you can live with the pros and cons of profiting off an investment bank.



    Disclaimer. I am in no way an expert on capital management or investing. On this blog I only wish to share my findings, ideas and comments on current events and fields that interest me. I hope that my thoughts can entertain you. I expect that everyone reading take their time and do their own research before acting on anything read on this blog. Investing is not for everyone. E&OE.

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