In the traditional process for issuing new securities, investment bankers perform one or more of three functions. Discuss those functions
Financial markets are divided into two major types depending on the timeframe of issuing the deals. They can be primary and secondary as the former deal with the deals and claims that are issued at the moment, while the latter deal with the already issued ones1. This paper will focus on the primary markets, and to be more exact on such a peculiarity of theirs as the process of new securities issuing. The role and functions of the investment bankers in this process will also be considered in this work.
To start with, it is necessary to realize the purposes of the issuing of new securities. Thus, they are issued by the Government or by the state organizations and corporations to confirm their liabilities according to a certain transaction or a set of them. By issuing these securities, the organizations show their ability and readiness to face the changes in the market. The prominent role in the issuing of new securities is assigned to the so-called investment bankers which can be either commercial banks or security houses2. The investment bankers fulfill one or more of the following functions in the security issuing process:
- Advising the issuers
- Buying securities from issuers
- Distributing securities among the public
The process of securities issuing starts with the monitoring of the market in which the issuers are to observe the quantity of the securities needed and the potential buyers of those securities. Investment bankers assist in this process and prepare the background for their second function – buying the securities issued. On the whole, the process when an investment banker organization buys securities from an issuer and takes the responsibility for selling them and for guaranteeing their eligibility for payment is called underwriting. This process is connected with certain risks and only a few companies can afford to face them alone. The majority of investment bankers form underwriting syndicates to share the risks and the possible benefits of the transactions.
Usually, there is a leading underwriter in a syndicate, or there may be several of them, who conduct the securities purchase and distribution. It is this underwriter that shares the highest rate of responsibility for the risks but also enjoys the largest share of the transaction benefit. On the whole, there are situations when an investment banker has to distribute the securities bought at the price lower than the price of the issuer. These situations occur in cases when risks rates are rather high for the securities of a certain issuer, and there are no buyers for them at their usual prices. The difference between the price of the securities purchase and selling is called the gross spread3, and it differs from issue to issue.
To conclude, investment bankers fulfill important functions in issuing new securities. There are three functions of investment bankers including advising, buying, and distribution of securities. The fulfillment of one function, or all of them, depends on the situation, the risks associated with it, and the market prices.
References
Fabozzi, F. J., Modigliani, F., Jones, J. F. & Ferri, M. G. (2002). Foundations of Financial Markets and Institutions, 3rd Edition, Prentice Hall.
Footnotes
- Fabozzi, F. J., Modigliani, F., Jones, J. F. & Ferri, M. G. (2002). Foundations of Financial Markets and Institutions, 3rd Edition, Prentice Hall, p. 262
- Ibid, pp. 262 – 263
- Ibid, p. 263