Investment banks and securities firms

Investment banks support corporations or governments in the issue of new debt or equity securities. Investment banking comprises

• The underwriting, origination and placement of securities in primary financial markets that the primary and secondary markets are discussed later in this section. The method of underwriting a stock or else bond issue needs the investment bank to purchase the entire issue at a predetermined price and then to resell it in the market. The investment bank followed by it bears the risk that they aren't able to resell the entire issue in which case it will hold the unsold stock on its own balance sheet. In pay back for taking on this risk the investment company receives an underwriting fee from the issuing company.

• Monetary advisory on corporate finance activities such like advising on mergers and acquisitions. In general investment banks gross their income from fees charged to clients.These fees are typically set as a fixed percentage of the size of the deal being worked.

A securities firm helps in the trading of existing securities in the secondary markets. There are two major categories of securities firms that are

• Brokers are the agents of investors who match buyers with sellers of securities. They make a commission for their service;

• Dealers are the agents who link buyers and sellers by buying and selling securities. They embrace inventories of securities and sell these securities for a slightly higher price than they paid for them. They consequently make the bid-ask spread the difference between the best asks lowest price charged for immediate purchase of stock as well as the best bid highest price received for an immediate sale of a unit of stock.

The major service obtainable by brokers is securities orders. Orders are trade instructions indicate what traders want to trade whether to buy or sell and how much and when and how to trade and on what terms. Traders issue orders when they can't personally negotiate their trades. There are two major types of orders market orders and limit orders. Market orders are instructions to trade at the best price at present available in the market.