What are the three major functions of an investment banker?
What will be an ideal response?
The investment banker performs three basic functions: (1 ) underwriting, (2 ) distributing, and (3 ) advising.
Underwriting: The term underwriting is borrowed from the field of insurance. It means assuming a risk. The
investment banker assumes the risk of selling a security issued at a satisfactory price. A satisfactory price is one that
generates a profit for the investment-banking house. A syndicate is a group of other investment bankers that is invited
to help buy and resell the issue.
Distributing: Once the syndicate owns the new securities, it must get them into the hands of the ultimate investors. This
is the distribution or selling function of investment banking. The investment banker may have branch offices across the
United States, or it may have an informal arrangement with several security dealers who regularly buy a portion of
each new offering for final sale. It is not unusual to have 300 to 400 dealers involved in the selling effort. The syndicate
can properly be viewed as the security wholesaler, and the dealer organization can be viewed as the security retailer.
Advising: The investment banker is an expert in the issuance and marketing of securities. A sound
investment-banking house will be aware of prevailing market conditions and can relate those conditions to the
particular type of security and the price at which it should be sold at a given time.