A Description of the Significance of Supply & Demand to an Investment Banking Firm
Supply and demand are common economic terms that appear in a variety contexts within the financial sector. Simply put, supply pertains to that amount of a financial product that is available to consumers or investors. Demand refers to the actual amount of the product that the consumers or investors want. In the investment banking industry, supply and demand have an impact on financial decisions and may have significance for an investment banking firm.
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Investment Banking
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Investment banking differs from traditional banking in that the primary goal of an investment banker is to help companies raise capital for start-up costs and continuing operations. This is done by finding investors who are willing to put up capital for an initial public offering of stocks or other investments such as bonds. These investors have the opportunity to purchase the investment vehicle for less than the price that it will initially sell to the general public. Supply and demand factor into this initial process because investors who put up the funds for the initial public offering must be able to see an actual demand for the products produced by the company in which they are investing.
Money Supply
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The supply of money in the economy also relates to investment banking. The Federal Reserve is responsible for increasing or decreasing the money supply as economic conditions warrant. In doing so, this has an impact on the amount of money that banks have available to lend. As the Federal Reserve increases the supply of money, this makes it possible for banks that borrow from the reserve to turn around and lend more money to those in need of capital. Because investment bankers are largely responsible for finding capital for investors, the money supply that banks have access to plays a direct role in the success of investment bankers' activities.
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Business Worth
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Investment banking goes beyond the scope of just lining up capital for companies or entrepreneurs. Investment banks are also what officials in the investment world call "market makers." They are responsible for determining the true value of a company and determining the price at which its stock will eventually trade. Stocks that are overpriced may not sell and demand for such investments may decrease as a result. The reverse can be true when a company is undervalued.
Employment of MBA Graduates
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A 2008 article by Paul Oyer of Stanford University in "The Journal of Finance" notes that supply and demand for MBA graduates fluctuates according to current economic conditions. He notes the fact that some begin their careers in investment banking immediately out of their MBA program, but the decision to do so is often tied to economic conditions. Higher demand for graduates during bull markets leads to greater numbers entering the field. This, in turn, generally results in greater earnings for these investment bankers in the long-term.
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