Navigating the World of Corporate Finance (2/2)
In this lesson, you’re expected to learn about:
– securities firms
– underwriting services
– types of funds
What are Securities Firms?
Securities firms provide transaction services related to financial investments, which are quite distinct from the services provided by traditional depository organizations (which we saw in the previous lesson).
Many commercial banks have separate departments that offer the services of securities firms and some merge or partner with securities firms. Other securities firms are completely independent of any depository institution.
An investment bank is typically a private company that provides various financial-related and other services to individuals, corporations, and governments.
They offer a wide range of services including:
– underwriting services for companies that issue stocks and shares on the primary market.
– broker-dealer services for buyers and sellers of stocks and shares on the primary and secondary markets.
– merger and acquisition services.
– assistance with corporate reorganizations and liquidation procedures.
– general consulting services for large organizations.
Broker-dealers, as the name suggests, perform the services of brokers and dealers.
Let’s look at what each of these roles entails.
1) Brokers: organizations that conduct securities transactions on the part of their clients – buying, selling or trading for the investment portfolio of their clients.
Some companies have their own internal underwriting departments while others outsource to external companies that specialize in underwriting.
1) Banking Underwriters
They assess the risk and potential of loan applicants to pay back their loans, assisting banks in determining what interest rate to charge and whether applicants are even eligible for a loan.
They assess the value of a particular organization or other asset for which securities are being issued. In other words, if a company wants to become listed in the stock exchange, one step in that process is to determine the value of the company, the number of shares to issue and the amount of money the company is liable to raise.
Securities underwriters also help with the distribution and sale of the original shares of stock to raise money for the company to become listed.
Individuals pool their money together in a fund, which is money that is managed as a single investment portfolio and the individuals contributing to that portfolio receive returns on their investments in proportion to their ownership from the returns generated by the entire portfolio.
Each fund has its own investing strategy and so investors choosing between funds need to pick one that has a strategy they believe is going to benefit them the most.
Funds typically come in two types:
– Hedge Funds
– Mutual Funds
Though they both have the same fundamental principles, each type has some unique traits, processes, and variations.
Managers have more freedom in their use of investment tools and an ability to change strategy as they see fit.
Hedge funds typically charge a fee based on performance of the fund; the better the fund performs in the market, the more the investors pay in fees.
Hedge funds pool the assets of the investors collectively and invest them.
Managers must adhere strictly to the strategy described when the fund was established and must choose from a rather limited range of investment types.
Mutual funds are highly regulated in terms of the amount they can charge in fees and the types of fees they can charge.
Mutual funds sell shares in two types: open-end (no restrictions apply on the number of shares issued) or closed-end (traded like shares).