investment bank

—investment banker. —investment banking.

a financial institution that deals chiefly in the underwriting of new securities.

[1920-25]

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Firm that originates, underwrites, and distributes new security issues of corporations and government agencies.

The Banking Act of 1933 required the separation of investment banking and commercial banking functions. Investment banks operate by purchasing all the new securities issued by a corporation at one price and selling fractions of the new issue to the investing public at prices high enough to yield a profit. The investment bank is responsible for setting the public offering price, which it bases on probable demand and assessments of the economic climate. A syndicate of investment banking firms underwrites and distributes most security issues in order to divide the risk of the new issue. An initial public offering (IPO) refers to the issuance of the first public shares of a formerly nonpublic company. See also bank; central bank; savings bank; security.

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also called  merchant bank 

      firm that originates, underwrites, and distributes new security issues of corporations and government agencies. Unlike a savings bank, an investment bank is a commercial bank that does not accept deposits. The investment (or merchant) banking house operates by purchasing all of the new security issue from a corporation at one price and selling the issue in smaller units to the investing public at a price sufficiently high to cover expenses of sale and earn a profit. The major responsibility for setting the public offering price rests on the investment bank because it is in close contact with the market, is familiar with current interest rates and yields, and is best able to judge the probable demand for the issue in question.

      In the underwriting and distribution of most security issues a syndicate of investment banking firms is organized. If the amount of capital sought is large enough to prevent one investment banking firm from undertaking the risk of purchasing the entire issue, the investment bank that initiates the issue with the corporation will organize a group of investment bankers to divide the liability for the purchase. In such a case the originator will act as manager of the group.

      If the market coverage that can be obtained by the members of the syndicate is deemed insufficient, selected dealers are used to bring about a wider distribution. Securities are sold to the dealers at a reduction in price (known as a concession), which reimburses the dealer for his expenses and is meant to provide him with a profit.

      When new securities are to be issued, an investment firm having close contact with the corporation is likely to be asked to originate the issue. This process often is called private negotiation. An alternative arrangement is competitive bidding, under which the corporation itself settles upon the terms of the issue to be offered and then invites all banking firms to submit bids. The issue will be sold to the highest bidder.

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