invbanks - Investment Banks Economics 71a Spring 2007 Mayo,...

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Investment Banks Economics 71a Spring 2007 Mayo, Chapter 2 Lecture notes 2.2
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Outline What is an investment bank? Role in financial markets Investment banks and new securities IPO mechanics
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What is an Investment Bank? Not a bank! Help firms sell securities to public Stocks/Equity Bonds/Debt Transfers funds from public to firms Savings -> Investments Example: Goldman/Sachs
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Initial Public Offering (IPO) First sale of stock by firm Originating investment bank Key player in bringing the shares to market “Originating house” Handles most administrative details Reputation
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Underwriting A form of price guarantee Agree to purchase shares from firm for a given amount Then sell to the public Example: Purchase stock from Yahoo ($10/share) Sell on the market ($11/share)
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Risk of Underwriting Market may not be willing to pay the price paid by investment bank ($10) It would lose money Investment banks often spread this risk over several investment banks “Underwriting Syndicate” Also, try to reach more sellers “Selling group”
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IPO Scandals Most involve investment banks giving special deals to some favored customers (low prices)
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invbanks - Investment Banks Economics 71a Spring 2007 Mayo,...

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