Last updated on February 27th, 2021 at 11:48 am
Understanding Investment Banking
Investment banking can be defined as a unique division in the Finance and Banking Industry that deals with providing capital for companies, guiding on profitable investment avenues and complex securities, facilitating other investment-related transactions.
One of the primary functions of investment banking is seen in the context of Initial Public Offerings (IPOs). Investment banks act as the underwriter and mediate the deal between the company seeking funds and the investors looking to park their investments in profitable avenues. Investment banks also help to facilitate the mergers and acquisition deals for their clients by leveraging their vast network and expertise in the domain.
How Does It Help Society?
The Finance and Banking Industry are the twin pillars of the present day Capitalism. The concept of money multiplier came into existence due to the evolution of the banking industry. The wealth creation process has been escalated due to the presence of investment infrastructure created by the investment banking industry. Let’s see the macroeconomic impact of the investment banking industry that helps the contemporary capitalist society.
Market Liquidity
The contemporary economic setting is characterized as a mixed one; a mixed economy system has elements of kinds, the market economy as well as the planned economic system. In the mixed economic structure, both the government and private enterprises rely on investment banks for fundraising to a great extent.
The traditional function of investment banks included mediating deals between the buyers and sellers of securities and other financial instruments, in facilitating the deals investment banks helps to add liquidity in the market. Think of a situation where investment banks are not present in the economy, how will a company raise funds during its IPO? Well, it’s certainly a difficult situation to find two parties who need what the other has, almost like a barter system scenario.
Connecting Present And Future Consumptions
One of the major functions of the banking industry is to control the supply of money to induce saving and consumption using interest rates. The market rate of interest determines how lucrative it is to save or invest money; if the interest rates are higher people will save more money than spend it because they will get a higher return in the future.
If interest rates are lower, people will prefer keeping liquid money instead of investing it in a financial instrument or saving it in a bank. The investment banks help in shaping the market rate of interests, the more efficient it is in establishing the interest rates the better the resources can be channelled between the present and future needs.
Impact Investing
In the contemporary landscape, people and companies are more concerned about the environment. Today, it’s not just about growth but about creating sustainable growth that will not compromise with the needs of the future generations. The new-age start-ups are all about solving modern problems and creating businesses around the problems that are hampering the environment and society.
The main emphasis is laid on using money and investment capital for social gains rather than just boosting profitability, it’s more like making an informed investment decision.
Funding is the most important factor to grow any business, no matter how good your intentions are for the society you need funds for running and growing your business to make an impact. Investment banks can help businesses with good intentions in their funding needs. This process of providing funds to businesses that are determined to make an impact in society is called impact investing. Impact investing aims to produce environmental benefits in addition to financial gains for the business.
