Capital Markets and Investment Banking Process
Capital Markets and Investment Banking Process The investment environment is vast and can be overwhelming if not entered into correctly. Firm’s issuing new securities to enhance revenues understand the complexities and risks involved when entering the primary market, and will employ investment bankers to mitigate those risks. Described throughout this paper is the investment banking process and portfolio construction, factors for selecting the portfolio asset classes, the capital market instruments used in portfolio construction, and recommendations for the composition of an investment portfolio.
Investment Banking Process and Portfolio Construction Investment bankers work with
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“While all capital market instruments are designed to provide a return on investment, the risk factors are different for each and the selection of the instrument depends on the choice of the investor” (Maps of World Finance, 2009, para. 6). Investors that use stocks in their portfolio construction are investing in equity securities that represent an ownership share in a publically traded company. Investors that purchase a company’s common stock are seeking to profit through capital gains, which is a profit gained if the stock price at the time of purchase is less than the stock price at the time of sale (Bodie, Kane, & Marcus, 2008). Using stocks as a capital market instrument in an investment portfolio is beneficial to investors that desire a long-term investment with moderate risk. Investors still take on the risk that the stock price will fall below the purchase price at the time of sale, or that the company will go bankrupt and the stocks will be worthless. The other major capital market instrument used in portfolio construction is debt instruments, or bonds. The debt instruments in the capital market are, “Treasury notes and bonds, corporate bonds, municipal bonds, mortgage securities, and federal agency debt” (Bodie, Kane, & Marcus, 2008, P.30). Investors that use bonds in their investment