Investment Banking
Investment banking is a business activity in which a company purchases newly issued securities, such as stocks and bonds, from businesses and governments. Such a company, called an investment bank, then resells the securities to individual investors in smaller quantities. Thus, the investment bank helps large borrowers raise money quickly and efficiently by taking over much of the job of marketing the stocks and bonds that are being issued. Without investment banks, businesses that lack experience in doing so would have to market their own securities.
Investment bankers also advise businesses in arranging corporate mergers and acquisitions. Investment banks do not accept deposits from the public or make loans to businesses or individuals.
Investment banks buy securities at a slightly lower price than they expect to sell them for. The difference between the purchase and sale prices represents profit. Sometimes, however, the investment bank overestimates the demand for the securities it buys, and must sell them at a loss. Thus, the investment bank assumes the risk of making or losing money on the sale of securities. To avoid this risk, a business or government sells its securities to the investment bank for less than it might get by selling them directly to investors.
The Securities Exchange Acts of 1933 and 1934 established minimum standards of disclosure to protect the public from investing in unsafe securities. The 1934 act set up the Securities and Exchange Commission to enforce the new rules. Through the years, Congress has provided more protection for investors.