Solutions for End-of-Chapter Questions and Problems: Chapter Four
Explain how securities firms differ from investment banks.
In what ways are they financial
Securities firms specialize primarily in the purchase, sale, and brokerage of securities, while
investment banks primarily engage in originating, underwriting, and distributing issues of
In more recent years, investment banks have undertaken increased corporate finance
activities such as advising on mergers, acquisitions, and corporate restructuring.
In both cases,
these firms act as financial intermediaries in that they bring together economic units who need
money with those units who wish to invest money.
In what ways have changes in the investment banking industry mirrored changes in the
commercial banking industry?
First, both industries have seen a concentration of business among the larger firms.
concentration has occurred primarily through the merger and acquisition activities of several of
the largest firms.
Second, firms in both industries tend to be divided along product line services
provided to customers.
Some national full-line firms provide service to both retail customers, in
the form of brokerage services, and corporate customers, in the form of new issue underwriting.
Other national full-line firms specialize in corporate finance and security trading activities.
Third, the remaining firms specialize in more limited activities such as discount brokerage,
regional full service retail activities, etc.
This business line division is not dissimilar to that of
the banking industry with money center banks, regional banks, and community banks.
product line overlap occurs between the different firm divisions in each industry.
What are the different types of firms in the securities industry, and how does each type
differ from the others?
The firms in the security industry vary by size and specialization.
National, full-line firms servicing both retail and corporate clients, such as Merrill
b) National firms specializing in corporate finance and trading, such as Goldman Sachs,
Salomon Brothers and Morgan Stanley.
Securities firms providing investment banking services that are subsidiaries of
commercial banks. These subsidiaries continue to make inroads into the markets held
by traditional investment banks as the restrictions imposed by the Glass-Steagall Act,
which separates commercial banking from investment banking, are slowly removed.
d) Specialized discount brokers providing trading services such as the purchase and sale of