Here, I share secrets about the best ways to learn Investment Banking, Financial Modeling, Equity Research, Private Equity, Accounting, analyze Stocks and buzzing IPOs, M&As, Valuations and more.

What is Investment Banking? (Overview of what do they actually do!)

Private Placement, IPO and FPO in Investment Banking

Investment Banking Underwriters and Market Makers

Investment Banking Mergers and Acquisitions

Investment Banking Restructuring and Reorganisation

Investment Banking Roles and Responsibilities

Top 4 Must Know Investment Banking Charts (Free Download Template included)

Pitch Book Guide to Investment Banking Pitch Book (Examples)

Investment Banking Interview Questions (with Answers)

Investment Banking Job For Graduates (Engineers) Top 8 Tips

Top 10 Best Finance courses (with Online Certification)

This is the 6th tutorial in 9 series tutorials on Investment Banking.

If you want to learn M&A professionally, then you may want to look at 25+ video hours ofMergers and Acquisitions Course

In this tutorial, we discuss the following

Let us now look at overall framework we have learn what is research we have looked at sale sales and trading  we have also looked at raising capital  now we will move to underwriters and market makers these are basically to industry jargons which are very important for us understand so when we talk about IPOs what happens is let say if the company is wanting to raise  100 Million Dollars and if they are unable to do so  then what happened there is risk associated with it were we probably assumed that the IPO may go unsuccessful mitigate the risk investment banks actually underwrite an IPO which means that if there is under  subscription them investment bank will actually buy those shares.

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Now let us discuss another importantfunction of an investment bankwhen we talk about IPOs that is called as Underwriting. So we are hearing a lot about investment banks to underwriting for various IPOs what exactly it means? So lets take an example here in order see what Underwriting means lets see that you know there is a small company that is a private company and they want to kind of raise new securities so we have discussed this earlier. So they may raiseusing an IPO or the Initial Public Offeringsbut the problem is that you know there may be risk associated with under-subscription?

What this under-subscription would mean is lets say this company wanted to raise 100 Million Dollars from the market. The risk of under-subscription means that whatever they wanted to raise they may not able to raise so not 100 million maybe they  are able to raise 50 Million thats under-subscription you know there are investment bankers who basically underwrite the securities and the helps the firms raise the committed amount so what this means is that if an investment banker is underwriting the securities he virtually guaranteeing that the amount that is committed to be raised will be raised and how does the investment bank actually ensures this? So essentially when IPO actually comes so the stocks are given to the investor and let say if there is under-subscription of any kind lets say to an extent of 10 Million Dollars. So these 10 Million Dollars worth of stocks will be absorbed by investment bank so we are essentially saying that the investment bank will actually buy this share and sale that appropriate time in order to make a profit. So underwriting means that essentially you guaranteeing that any amount of under-subscription will be absorbed by the investment bank and obviously as you can see that the investment bank isassuming financial risk, the financial risk could be that lets say IOP was not success full so the investment bank may have to buy the stock to an extent it was undersubscribed and lets say the stocks stang after some time so thats a huge risk for investment bank. So thats why when we talk about underwriting investment banks actually charge hefty fees during the underwriting scenarios and in this process, they have to actually talk in detail with risk department as well compliance department about the amount of risk or quantum of risk that the investment banks can take with respect to underwriting. So with this, we have understood underwriting as one of the most important functions investment banks are also you know enabling market making activities in the stock exchange so what is market making and why investment banks actually play a very important role here lets look at that through this underwriters and market makers video.

No. 2 is very interesting this is related to the Market Maker. Now, what do you really understand by being a market Maker? So there can be companies like you know theinvestment banks firmswhich also are Market Maker. Market Maker is someone who actually ensures liquidity in the market. Just to give you a basic example lets say there is stock called ABC this IB is a market Maker for this stock ABC. When a Market Maker meaning that you know when there are trades that happened in the market the role of a Market Maker is essentially to provide liquidity to the stocks and this could be done by either buying the shares or selling the shares in order to literally explain this to you in a very basic way lets take an example ABC for which IBs are Market maker and lets say there is but there is an investor who wants to buy 1000 shares of ABC but his price is $50. Lets say then there is a seller in the market who wants to sell this share of ABC but he wants to sell it at 100 and he also wants to do that for 1000 shares. So now if you look at the distance between 50 and 100 is too huge. So you know the transaction may never get completed at all so I mean what happens is that there may be few buyers and few sellers in this company altogether. So what the role of a market maker is all about is pitch in between and offer some lucrative price to the buyer or the seller store those shares probably trade them later for a profit. Now how do will they do that? So lets assume that in one of the cases lets say this IB who is a Market Maker actually offers to buy this share at $75. So here there was a seller at 100 but here there was a buyer at 50 but IB who is a market maker has kind of given quota. So there may be some sellers who may want to actually sell the stock so in that case you know they mat match and this investment banking who is Market Maker will actually own this share so what this Market Maker as actually done is in the able to transaction of the security by providing liquidity in the Market. So he is come in between and they you know kind of try to create the market and on the other side if lets say he owns the stock you know he can also look at selling the stock. So lets say he I mean the investment bank who owns this 1000 shares now want to sell this at $80. So instead of 100 you now try to sell at $80 so you may find some buyers as well so what you are doing incrementally is that since here the bid and the asks spread was too high as Market Maker you had coming between and now you have lowered bid as spread and ensure that there is some liquidity in the market so I mean this example was bit exaggerated but the bid as spread actually run into the only a couple of sense in that way this market makers have really proved very efficient and have been helping in the smooth running of the Financial Markets. So now that we have understood pretty much these 2 jargons underwriters and market makers.

Filed Under:Investment Banking BasicsInvestment Banking Guides

worked as JPMorgan Equity Analyst, ex-CLSA India Analyst ; edu qualification – engg (IIT Delhi), MBA (IIML); This is my personal blog that aims to help students and professionals become awesome in Financial Analysis. Here, I share secrets about the best ways to analyze Stocks, buzzing IPOs, M&As, Private Equity, Startups, Valuations and Entrepreneurship.

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