1 Securities Firms and Investment Banks

2 Investment An asset or item with value that is purchased for income or capital appreciation. Purchase of stocks, bonds, shares, real property, annuities, collectibles etc, with the expectation of obtaining income or capital gain, or both. Investment is the purchase of capital equipment. Such as the purchase of machines, equipment, factories that firms need to enable them to produce. –Replacement investment - this is where companies buy new machinery and equipment that simply replaces –Net investment - this is where companies buy new machinery or equipment. An asset or item with value that is purchased for income or capital appreciation. Purchase of stocks, bonds, shares, real property, annuities, collectibles etc, with the expectation of obtaining income or capital gain, or both. Investment is the purchase of capital equipment. Such as the purchase of machines, equipment, factories that firms need to enable them to produce. –Replacement investment - this is where companies buy new machinery and equipment that simply replaces –Net investment - this is where companies buy new machinery or equipment.

3 Financial intermediary that performs a variety of services. This includes underwriting, acting as an intermediary between an issuer of securities and the investing public. Facilitating mergers, acquisition and other corporate reorganizations, and also acting as a broker for institutional clients. Financial intermediary that performs a variety of services. This includes underwriting, acting as an intermediary between an issuer of securities and the investing public. Facilitating mergers, acquisition and other corporate reorganizations, and also acting as a broker for institutional clients. Investment Banks

4 Services Offered by Securities Firms versus Investment Banks Investment Banks –Service entities who wish to raise funds through sales of debt and equity securities, including corporations or governments; services include originating, underwriting, and placing securities in money and capital markets The wholesale side of the business Securities Firms –services involve assistance in the trading of securities in the secondary markets (brokerage services or market making) Purchase, sale, and brokerage of securities The retail side of the business Investment Banks –Service entities who wish to raise funds through sales of debt and equity securities, including corporations or governments; services include originating, underwriting, and placing securities in money and capital markets The wholesale side of the business Securities Firms –services involve assistance in the trading of securities in the secondary markets (brokerage services or market making) Purchase, sale, and brokerage of securities The retail side of the business

5 Services Offered by Securities Firms versus Investment Banks 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. The largest companies in the industry perform multiple services (e.g., underwriting and brokerage) and are generally called investment banks –advise corporations on mergers and acquisitions as well as advising on the restructuring of existing corporations 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. The largest companies in the industry perform multiple services (e.g., underwriting and brokerage) and are generally called investment banks –advise corporations on mergers and acquisitions as well as advising on the restructuring of existing corporations

6 Size, Structure, and Composition of the Industry Size of the industry is measured by the equity capital of the firms in the industry. Three major types of firms –national full-line investment banks that service retail and corporate customers (e.g.Next Page,) –national full-line firms that specialize in corporate finance (e.g., Next Page) –the remainder of the industry and includes five subclasses specialized investment bank subsidiaries of commercial banks –These subsidiaries continue to make inroads into the markets held by traditional investment banks as the restrictions imposed by the Banking Companies Act 1962, which separates commercial banking from investment banking, are slowly removed. Size of the industry is measured by the equity capital of the firms in the industry. Three major types of firms –national full-line investment banks that service retail and corporate customers (e.g.Next Page,) –national full-line firms that specialize in corporate finance (e.g., Next Page) –the remainder of the industry and includes five subclasses specialized investment bank subsidiaries of commercial banks –These subsidiaries continue to make inroads into the markets held by traditional investment banks as the restrictions imposed by the Banking Companies Act 1962, which separates commercial banking from investment banking, are slowly removed.

7 Investment Banks Atlas Investment Bank Limited Asset Investment Bank Limited Al-Towfeeq Investment Bank Limited Cresent Investment Bank Limited Escorts Investment Bank Limited Fidelity Investment Bank Limited First International Investment Bank Limited, Karachi Franklin Investment Bank Limited Islamic Investment Bank, Peshawar Jehangir Investment Bank Limited Orix Investment Bank (Pak) Limited Prudential Investment Bank Limited Security Investment Bank Limited Trust Investment Bank Limited

8 Size, Structure, and Composition of the Industry Specialized discount brokers – providing trading services such as the purchase and sale of stocks, without offering any investment tips, advice or financial counseling. (e.g. Charles Schwab) Regional securities firms – that offer most of the services mentioned above but restrict their activities to specific geographical locations. Specialized electronic trading securities firms Specialized discount brokers – providing trading services such as the purchase and sale of stocks, without offering any investment tips, advice or financial counseling. (e.g. Charles Schwab) Regional securities firms – that offer most of the services mentioned above but restrict their activities to specific geographical locations. Specialized electronic trading securities firms

9 Securities Firms & Investment Banks Activity Areas Investing Investment banking Market Making Trading Cash Management Mergers & Acquisitions Other Service Functions Investing Investment banking Market Making Trading Cash Management Mergers & Acquisitions Other Service Functions

10 Investing Involves managing pools of assets such as mutual funds Compete with commercial banks, life insurance companies, and pension funds Manage funds either as agents for other investors or as principals Objective is to select asset portfolios to beat some return-risk performance benchmark Involves managing pools of assets such as mutual funds Compete with commercial banks, life insurance companies, and pension funds Manage funds either as agents for other investors or as principals Objective is to select asset portfolios to beat some return-risk performance benchmark

11 Investment Banking Refers to activities related to underwriting and distributing new issues of debt and equity securities which involves helping customers raise funds in the Capital Markets and advising on mergers and acquisitions. The Investment Banking Division is generally divided into industry coverage and product coverage groups. –Industry coverage groups focus on a specific industry such as Healthcare or Technology, and maintain relationships with corporations within the industry to bring in business for a bank. –Product coverage groups focus on financial products, such as Mergers & Acquisitions, Financial Sponsors, and Leveraged Finance. Securities underwriting can be undertaken through either public or private offerings –Private placement - securities issue placed with one of a few large institutional investors –Public placement - may be underwritten on a best efforts or firm commitment basis and offered to the public Refers to activities related to underwriting and distributing new issues of debt and equity securities which involves helping customers raise funds in the Capital Markets and advising on mergers and acquisitions. The Investment Banking Division is generally divided into industry coverage and product coverage groups. –Industry coverage groups focus on a specific industry such as Healthcare or Technology, and maintain relationships with corporations within the industry to bring in business for a bank. –Product coverage groups focus on financial products, such as Mergers & Acquisitions, Financial Sponsors, and Leveraged Finance. Securities underwriting can be undertaken through either public or private offerings –Private placement - securities issue placed with one of a few large institutional investors –Public placement - may be underwritten on a best efforts or firm commitment basis and offered to the public

12 Market Making Involves the creation of a secondary market in an asset by a securities firm or investment bank Either agency or principal transactions –Agency transactions - two-way transactions on behalf of customers –Principal transactions - the market maker seeks to profit on the price movements of securities and takes long or short inventory positions for its own account Involves the creation of a secondary market in an asset by a securities firm or investment bank Either agency or principal transactions –Agency transactions - two-way transactions on behalf of customers –Principal transactions - the market maker seeks to profit on the price movements of securities and takes long or short inventory positions for its own account

13 Sales & Trading traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas and take orders. Sales desks then communicate their clients' orders to the appropriate trading desks, who can price and execute trades, or structure new products that fit a specific need. traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas and take orders. Sales desks then communicate their clients' orders to the appropriate trading desks, who can price and execute trades, or structure new products that fit a specific need.

14 Trading Closely related to market-making activities Six types of trading –Position trading - purchases of large blocks on expectation of favorable price move –Pure Arbitrage - buying an asset in one market and selling it immediately in another market at a higher price –Risk Arbitrage - buying securities in anticipation of some information release – such as mergers or Federal reserve’s interest rate announcement –Program Trading - simultaneous buying and selling using a computer program to initiate such trades –Stock Brokerage - trading securities on behalf of individuals –Electronic Brokerage - offered by major brokers, direct access via internet to trading floor Closely related to market-making activities Six types of trading –Position trading - purchases of large blocks on expectation of favorable price move –Pure Arbitrage - buying an asset in one market and selling it immediately in another market at a higher price –Risk Arbitrage - buying securities in anticipation of some information release – such as mergers or Federal reserve’s interest rate announcement –Program Trading - simultaneous buying and selling using a computer program to initiate such trades –Stock Brokerage - trading securities on behalf of individuals –Electronic Brokerage - offered by major brokers, direct access via internet to trading floor

15 Cash Management Securities firms and investment banks offer bank deposit-like cash management accounts (CMAs) to individual investors –money market mutual fund sold by investment banks that offer check-writing privileges Securities firms and investment banks offer bank deposit-like cash management accounts (CMAs) to individual investors –money market mutual fund sold by investment banks that offer check-writing privileges

16 Mergers and Acquisitions Frequently provide advice on, and assistance in, mergers and acquisitions –assist in finding merger partners –underwrite any new securities to be issued by the merged firms –asses the value of target firms –recommend terms of the merger agreement –assist target firms in preventing a merger Frequently provide advice on, and assistance in, mergers and acquisitions –assist in finding merger partners –underwrite any new securities to be issued by the merged firms –asses the value of target firms –recommend terms of the merger agreement –assist target firms in preventing a merger

17 Balance Sheet Assets Assets Cash $ 50, % Receivable from other broker-dealers 1,204, Receivable from customers 177, Receivables from noncustomers 15, Long positions in securities/commodities 838, Securities and investments not marketed 10, Securities purchased w/resell agreement 856, Exchange membership 1, Other assets 216,, Total assets $3,371, Assets Cash $ 50, % Receivable from other broker-dealers 1,204, Receivable from customers 177, Receivables from noncustomers 15, Long positions in securities/commodities 838, Securities and investments not marketed 10, Securities purchased w/resell agreement 856, Exchange membership 1, Other assets 216,, Total assets $3,371,

18 Balance Sheet Liabilities Liabilities Bank loans payable $ 76, % Payables to other broker-dealers 629, Payables to noncustomers 59, Payables to customers 391, Short positions in securities/commodities 409, Securities sold w/repurchase agreements 1,282, Other nonsubordinated liabilities 302, Subordinated liabilities 68, Total liabilities $3,227, Capital Equity capital 144, Number of firms 7,029 Liabilities Bank loans payable $ 76, % Payables to other broker-dealers 629, Payables to noncustomers 59, Payables to customers 391, Short positions in securities/commodities 409, Securities sold w/repurchase agreements 1,282, Other nonsubordinated liabilities 302, Subordinated liabilities 68, Total liabilities $3,227, Capital Equity capital 144, Number of firms 7,029