Discuss underwriting activities of investment banks and analyse how they impact dynamics of trading on the London Stock Exchange. (15 marks)

ANSWER

Discuss underwriting activities of investment banks

In investment banking, underwriting is the process where a bank raises capital for a client (corporation, institution, or government) from investors in the form of equity or debt securities.

There are two main functions in corporate finance: M&A Advisory and Underwriting.

M&A advisory includes assisting in negotiating, structuring, and performing a valuation of a merger or an acquisition associated with a deal. This service is usually provided by the advisory side of an investment bank, transaction advisor, or in-house by the corporate development group.

On the underwriting side, the process includes the sale of stocks or bonds to investors in the form of Initial Public Offerings (IPOs) or follow-on offerings.

how they impact dynamics of trading on the London Stock Exchange ?

An investment bank, which includes the likes of Bank of America, JPMorgan Chase, and Goldman Sachs, finances or facilitates trades and investment on a large scale for institutional clients. But that is an overly simplistic view of how investment banks make money. There are, in fact, several facets to what they do.

In a capitalist economy, investment bankers play a role in helping their clients raise capital to finance various activities and grow their businesses. They are financial advisory intermediaries who help price capital and allocate it to various uses.

While this activity helps smooth the wheels of capitalism, the role of investment bankers has come under scrutiny because there is some criticism that they are paid too much in relation to the services they provide.