When a company decides it needs long-term funds by marketing stocks and bonds, it must find people to buy them. This would be very difficult were it not for investment banking companies, whose main function is to market long-term securities for corporations. The investment banker is the middleman between company and investor. Once an investment banking company agrees to market a bond or a stock issue, it takes full responsibility for selling the issue.
Briefly, the procedure for raising new long-term funds is as follows. The company seeking funds approaches the investment banker, who in turn investigates the company to find out about its financial and technical prospects. An investment banker who underwrites a security guarantees the corporation a certain price for the securities. For example, if it is believed that a bond issue of $ 20 million can be sold at par, the investment banker may offer to underwrite the issue at $19 million. The corporation is guaranteed this amount, and the investment banker takes the risk of selling the issue. If the issue is indeed sold at par, the banker will make a gross profit of $1 million.
If a particular issue is so large that the banker cannot handle it all or does not want to assume all the risk, other investment bankers may be asked to participate in the offering by forming a syndicate. Sometimes as many as a hundred investment bankers form a syndicate to handle a single large securities offering.