How Investment Banks Work: A Simple Guide for First-Time Investors

Investment Banks play an important role in helping companies raise capital and supporting the overall capital market ecosystem. For a first-time investor, understanding what investment banks do can make the process of evaluating IPOs, bonds, and corporate actions easier.

What Is an Investment Bank?

Investment banks are financial institutions that help companies raise money, manage large financial transactions, and make strategic decisions. They work with corporates, institutions, and governments.

They are different from commercial banks, which focus on deposits and loans. Investment banks specialise in capital raising, advisory services, valuations, and market-related activities.

According to the Indian Brand Equity Foundation (IBEF), India’s investment banking and financial services sector has grown due to strong equity market activity and rising domestic investor participation. This highlights the growing relevance of investment banks in India.

How Investment Banks Help Companies Raise Capital

Equity Capital (IPOs and Follow-on Offerings)

When a company plans to go public through an IPO, investment banks manage the process from start to finish. This includes valuation, due diligence, pricing, regulatory filings, and connecting the company with investors.

They also manage follow-on offerings when already-listed companies raise additional equity.

According to EY’s India IPO Trends Report, India raised more than USD 6.8 billion through IPOs in FY24. Most of these offerings were executed with investment bank involvement.

Debt Capital (Bonds and NCDs)

Investment banks also help companies raise debt by issuing bonds or Non-Convertible Debentures (NCDs). They manage structuring, credit ratings, and placement with both institutional and retail investors.

For new investors, this expands access to stable fixed-income products.

Underwriting and Risk Management

Investment banks often act as underwriters. This means they commit to buying securities from the issuing company and then offering them to investors.

Underwriting reduces uncertainty for the company and ensures they receive the required funds, even if investor demand varies.

This helps create more confidence in the issuance process and supports smoother capital market activity.

Advisory Services for Corporate Transactions

Companies rely on investment banks for independent and expert advice on mergers, acquisitions, restructuring, and strategic choices.

Advisory services include:

• Business valuation
• Due diligence
• Deal structuring
• Negotiation support

These services help companies expand or streamline operations. For investors, this explains how companies grow through acquisitions or reorganisations.

Supporting Secondary Markets

• Investment banks also play a role in secondary markets by acting as brokers or dealers.

• They help maintain liquidity so investors can buy or sell securities without difficulty.

• Liquidity supports better price discovery and a more efficient market.

• Many investment banks also offer equity research that guides investors on market trends, company fundamentals, and sector performance.

Why Investment Banks Matter to First-Time Investors

Investment banks shape many parts of the investment lifecycle. They matter to new investors because:

• They bring IPOs and bond issuances to the market

• They structure and price new issues

• They create investment opportunities across equity and debt

• Their due diligence and advisory services add a layer of quality review

• They support liquidity, market depth, and overall stability

Investment banks act as trusted intermediaries between companies and investors.

The Broader Impact on the Economy

Investment banks support capital formation, which enables businesses to expand, create jobs, and innovate. A strong investment banking ecosystem leads to deeper and more efficient markets.

Government and industry reports show that India’s capital markets have expanded significantly due to rising investor participation. Investment banks play a central role in enabling this growth.

What First-Time Investors Should Keep in Mind

• Read the prospectus or offer document when considering an IPO or bond issue

• Check research reports to understand company fundamentals

• Evaluate the pricing and structure of the issue

• Do not rely only on short-term sentiment

• Understand that investment banks facilitate opportunities, but returns depend on company strength and market conditions

FAQs

1. What is the main role of an investment bank?

The main role of an investment bank is to help companies raise capital, manage financial transactions, and provide advisory services on strategic matters such as mergers and acquisitions.

2. How does an investment bank earn revenue?

Investment banks earn revenue through underwriting fees, advisory fees, commissions from trading, and research services.

3. Why do companies need investment banks for IPOs?

Companies work with investment banks for IPOs because banks manage valuation, pricing, regulatory processes, marketing, and distribution of shares. Their expertise helps ensure a smoother and more successful listing.

4. Are investment banks involved after an IPO?

Yes. They support trading, provide research coverage, and help maintain market liquidity. They may also assist with follow-on offerings.

5. How does this matter to first-time investors?

Understanding the role of investment banks helps investors evaluate IPOs, bond issuances, and corporate actions more clearly. It also helps investors understand how markets function behind the scenes.