Friday, December 30, 2011

Modern Investment Bank

Firms engaged in this business became known as investment banks. Firms like JP Morgan didn't limit themselves to investment banking, but established themselves in a variety of other financial businesses including lending and deposit taking (i.e. commercial banking). This resulted in the separation of investment banking from commercial banking (the Glass-Steagall Act of 1933). Many of the large global firms today conduct both merchant banking (private equity) and investment banking.

In the United States, investment banks operate according to legislation enacted at the time of Glass-Steagall. The Securities Act of 1933 became a blueprint for how investment banks underwrite securities in the public markets. The 1934 Securities Exchange Act addressed securities exchanges and broker-dealer organizations. The 1940 Investment Company Act and 1940 Investment Advisors Act established regulations for fiduciaries, such as mutual funds, private money managers and registered investment advisors. The new issue market is called the primary market. Investment banking is fraught with potential conflicts of interest. When a firm in which the main line of business is sell side, investment banking acquires a buy-side asset manager, and these incentives can be at odds.

Regulations mandate that banks enforce a separation between research and banking, popularly referred to as a Chinese Wall. In reality, however, many firms have tied research analysts' compensation to investment banking profitability. A discussion on investment banking wouldn't be complete without addressing the enormous sums of money that investment bankers are paid.

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Thursday, December 29, 2011


Nearly everyone is familiar with commercial banks such as Wells Fargo and Bank of America. An investment bank on the other hand exists to provide services to private and public companies. In the beginning the purpose of an investment bank was to help companies raise capital through equity offerings and debt issuance and to advise and assist with mergers and acquisitions. Since then the role of the investment bank has evolved and expanded dramatically. The investment bank can sell equity in the company in the form of a stock offering or they can offer advice on the issuance of debt, or bonds, by the company. As you might imagine, an investment bank often has a broad network of contacts within the financial industry. A good investment bank will be able to use this network to provide detailed market knowledge and guidance, legal advice and investment opportunities on a global, countrywide or regional level.

Wednesday, December 28, 2011

Foreign direct investment (FDI)

The expression foreign direct investment (FDI) is one that has become very popular in the present dispensation.

More to the point, liberalization in some countries seems to encourage foreign investors to set up businesses in these countries.

In most cases, the normal practice would be for the investors from a stronger economy to invest in smaller economies.

Thus, most people associate FDI with American countries operating in Mexico, China, Brazil or smaller countries in Africa and Asia. Some reasons for direct foreign investmentmay include lower taxes, low costs of labor, tax concessions or superior currency value.

Other advantages may include the presence of large markets in the foreign countries and favorable banking policies. In some cases, certain countries encourage investors to invest in the industries where local investors may not be able to cope.

There are instances where investors from developing nations can invest in the developed economies of Canada, America and Europe.

For instance, there are investments in America owned and operated by rich investors from Dubai, Saudi Arabia and Kuwait.

For instance, no country will want its arms industry to be controlled by any foreign firms for very obvious reasons.