Why do corporations employ investment bankers?
In general, the corporation always goes for employees with a background in banking investment due to their expertise in selling and security distributions. Further, these professionals have selling networks and they are frequently interacting with the financial markets. At times, the corporations may issue securities while bankers it is their full-time duties. Therefore, the bankers’ expertise may play an essential role in designing the issuing of right security, obtaining a fair price, and obtaining a wide distribution network.
Identify the primary market functions of investment bankers.
More often, these experts identify or originate the firms which are growing and can benefit from security offerings. It is from here that the investment bankers market their firms as the most favorable in helping other firms raise capital. Similarly, they can carry the risk or underwrite the new offering through their capital in purchasing the security being issued and the selling to ready investors. For the high-risk issuers who are often "small," they may offer help by making security sales on a commission basis without risking the capital. Last but not least, they may provide assistance to small firms in privately placing securities or selling securities.
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Discuss how investments bankers assume risk in the process of marketing securities of corporations? How do they try to minimize their risk?
Basically, the risk involved in the outright purchase is high. However, a perfect agreement presents less or no market risk and thus, the firms have only to incur the opportunity cost of unsuccessful sales efforts. Investment bankers minimize risks in three ways. First, by distributing large issues through syndicates which spreads the risk in more than one banking house. Second, through market stabilization and third, use of SEC to make prompt sales of securities after the approval.
Explain market stabilization
After the security offering, some of the syndicate members may be willing to repurchase at an offer price, the shares offered. Therefore, market stabilization involves actions that focus on supporting the price and calming market jitters about a stock after a new stock offering.
