Chapter: 2 How Securities are Issued?

Section: 2 Investment Bankers

Investment bankers are firms specializing in the sale of new securities to the public, typically by advising, structuring and underwriting the issue. Just as economies of scale and specialization create profit opportunities for industrial concerns and financial intermediaries, so do these economies of scale create niches for firms that perform specialized services for businesses. Firms raise much of their capital by selling securities such as stocks and bonds to the public. Because these firms do not do so frequently, investment-banking firms that specialize in such activities can offer their services at a cost below that of maintaining an in-house security issuance division.


Investment bankers such as Goldman Sachs, Merrill Lynch, or Solomon Smith Barney in US, or Gulf Investment Bank or Arab Banking Corporation in the GCC region, advise the issuing corporation on the pricing of the issue, appropriate interest rate, and so forth. Ultimately, the investment-banking firm markets the security issue to the investing public through road shows, advertisements, etc. Apart from raising capital, investment bankers can offer their expertise in a wide range of services to their clients. The fact that investment bankers are constantly in the market, assisting one firm or another in issuing securities, and depend on their reputation to generate future business, helps in creating confidence of the investing public in investment banking institutions. The investment banker will suffer along with the investors if the securities it underwrites are marketed to the public with overly optimistic or exaggerated claims; the public will not be so trusting the next time that investment banker participates in a security sale.