Investment Banking Vs Corporate Finance

A bank is a financial institution that is allowed to receive deposits and provide loans. Financial services including currency exchange, wealth management and safe deposit boxes may be offered by banks. Retail banks, corporate or commercial banks, and investment banks are among the several types of banks. Banks are vital to the economy because they provide key services to both consumers and businesses. They provide you with a secure place to deposit your money as a financial services provider. You can execute typical banking operations such as deposits, withdrawals, check writing, and bill payments using a range of account types such as checking and savings accounts, as well as certificates of deposit (CDs). You can also put your money aside and earn interest on it. The Federal Deposit Insurance Corporation (FDIC) insures money in most bank accounts.

Investment Banking

Investment banking refers to the activities of a financial services organisation or a corporate division that involve advising people, corporations, and governments on financial transactions. Traditionally connected with corporate finance, a bank like this might help a customer raise money by underwriting or serving as the client’s agent in the issue of debt or equity instruments. An investment bank may also help corporations with mergers and acquisitions (M&A) and provide auxiliary services like market making, derivatives and equity securities trading, FICC (fixed income, currencies, and commodities) services, or research (macroeconomic, credit or equity research). In addition to their investment research divisions, most investment banks have prime brokerage and asset management sections. The Bulge Bracket (highest tier), Middle Market (mid-level businesses), and Boutique Market make up the industry (specialized businesses).

Example of Investment Banking

Let’s say John’s Tea Co., a tea supply chain, wants to go public. John, the owner, contacts Kim, an investment banker who works for a larger investment bank. John and Kim reach an agreement in which Kim (on behalf of his firm) agrees to purchase 100,000 shares of John’s Tea for the company’s IPO at $24 per share, a price determined by the investment bank’s analysts after careful consideration.

The investment bank pays $2.4 million for the 100,000 shares and begins selling them for $26 per share after filing the necessary paperwork. However, the investment bank is unable to sell more than 20% of the shares at this price, and must cut the price to $23 per share to sell the remaining shares.

The investment bank made $2.36 million on the IPO deal with John’s Tea [(20,000 x $26) + (80,000 x $23) = $520,000 + $1,840,000 = $2,360,000]. In other words, Kim’s firm lost $40,000 on the sale because John’s Tea was overrated.

Investment banks frequently compete with one another for IPO projects, forcing them to raise the amount they are ready to pay to secure the contract with the company going public. If the competition is exceptionally strong, the investment bank’s bottom line may suffer a significant blow. The majority of the time, however, more than one investment bank will be endorsing securities in this manner, rather than just one. Whereas it means that each investment bank will have less to gain, it also means that risk will be decreased.

Corporate Finance

Corporate finance is the branch of finance that deals with funding sources, corporate capital structures, management measures to maximise the firm’s value to shareholders, and the procedures and evaluation used to assign financial resources.

On the other hand, corporate finance is separated into two sub-disciplines. Capital budgeting is focused with evaluating whether value-adding activities should receive investment funding or if that investment should be financed with debt or equity capital. The administration of a company’s monetary funds that deal with the company’s short-term operating balance of current assets and current liabilities, with a focus on cash, inventory, and short-term borrowing and lending, is known as working capital management (such as the terms on credit extended to customers). Economies of scale are inextricably linked to corporate finance.

Examples of Corporate Finance

While not inclusive, the following are some of the most common instances of corporate finance activities:

• Putting together an initial public offering (IPO): An initial public offering (IPO) is when a privately held firm decides to list on a stock exchange in order to get access to capital markets.

• Obtaining a credit score: A good credit score will typically result in better borrowing terms. To accomplish this, the corporate finance director will commission a creditworthiness report from an independent rating agency.

• Solving bond issue: A bond is a long-term loan that is funded by the first “bondholder,” the person who buys the bond. These bonds can be bought and sold on the open market, and anyone who owns them will be paid interest then repaid in accordance with the terms of the bond arrangement.

• Obtaining a loan from a financial institution: The terms of such loans are frequently based on the credit rating of the company or are asset-backed.

• Payment arrangements with suppliers or consumers are being redefined and renegotiated.

• Creating and implementing a dividend scheme for investors.

Investment Banking vs Corporate Finance

• The fundamental distinction between corporate finance and investment banking is that the former is a larger notion, whereas the latter is a more focused one. Furthermore, corporate finance includes investment banking.

• Corporate financing aids in the management of a company, whereas investment banking permits a company to expand, i.e. raise capital.

• Another distinction is that the former is used to assess one’s own company’s financial accounts. The latter, on the other hand, is used to examine the financial accounts of other businesses. In other words, corporate finance is concerned with financial operations and allows a company to make critical investment and capital-raising decisions. Investment banking, on the other hand, is involved with major financing activities of other companies in order to assist them in raising funds. Investment banking activities include any mergers and acquisitions of other companies, stock issues, and other financing activities aimed solely at allowing organisations to raise their share capital.

• Corporate financing aims to assist a company optimise its value through strategic financial decisions, and it entails actions such as resource allocation, reinvestment possibilities identification, capital raising through the issuance of equity or debt, and so on.

• The number of work jobs available in finance is more than the number of job roles available in investment banking.

• Jobs in corporate finance are less competitive than those in investment banking.

• A corporate financing analyst will be responsible for preparing financial reports for the company they have been engaged to work for. An investment banking analyst, on the other hand, will be responsible for preparing pitch books and memorandums for other businesses.

Conclusion

Corporate finance is one of the most significant divisions of a company since issues like financing, capital structuring, and investment decisions are critical to a company’s success. It distinguishes itself from the competition by focusing on maximising shareholder value via long and short-term financial planning and the implementation of diverse strategies while balancing risk and profitability. In a rising economy, where all enterprises desire to raise cash through stock and shares, Investment Banks can assist these organisations by providing underwriting services, allowing them to maximise revenue while maintaining within regulatory guidelines.