Page 485 - Introduction to Business

CHAPTER 13 Financial Management of the Firm and Investment Management 459

The Role of Investment Managers

LEARNING OBJECTIVE 5
Describe different types of investment managers and the services they provide investors.

Investment managers provide a variety of services for individual, business, and
government participants in the financial markets. Financial managers in firms ben-
efit from the services of investment bankers. These investment specialists assist investment bankers Investment
firms seeking to raise funds by means of either debt or equity. Many times an managers who assist firms seeking to
raise debt or equity funds from the
investment bank will purchase the bonds or stocks directly from the firm, which is
financial marketplace
known as underwriting. Subsequently, they turn around and try to sell the under-
underwriting The purchase of
written securities for a higher price in the financial marketplace. Investment securities from a firm by an investment
bankers earn revenues from service fees for professional advice, as well as from the bank, which then seeks to sell the
securities at a higher price in the
difference between the buying and selling prices for securities. Because a merger or
financial marketplace
acquisition of another firm normally involves raising funds, investment bankers
work closely with client firms in this process. A merger or acquisition is an expen-
sive venture and so is a lucrative source of revenues for investment banks.
Securities issued by firms are purchased in the financial marketplace by indi-
viduals and large institutions. Brokers assist investors purchasing and selling brokers Investment managers who
financial securities. They earn service fees for making securities transactions. By execute buy-and-sell orders for
securities and earn commissions on this
being members of national and regional stock exchanges, they have representatives
service
on the trading floor standing ready to execute buy-and-sell orders of securities for
their customers. There are three kinds of brokerage firms.
• Full-service firms do more than fill buy-and-sell orders for securities. They have
large research departments to analyze firms’ profitability and risk. Also, they
employ market experts to help advise clients on investment decisions. Full-
service brokerage firms can offer clients comprehensive financial planning
services that include savings and retirement, estate management, tax advice,
corporate services, and so on. You can even combine a brokerage account with
a checking account and credit card in an asset management account. asset management account An
investment account that combines
• Discount brokerage firms tend to have lower-cost services than full-service brokerage, checking, and credit card
firms and put more emphasis on executing buy-and-sell orders. Today, some services
of these firms are adding research and financial services, but these services are
limited.

• Online brokerage firms are low-cost, computer-electronic communications
providers of security trading services. Their websites offer research and other
informational content that is useful to investors. Their disadvantage is that
there is no personal adviser to ask questions of and get recommendations from.
All three types of brokerage firms make most of their revenues from commissions
earned on buy-and-sell transactions ordered by investors.
Dealers are firms that buy and sell securities but do so from an inventory of dealers Investment managers who buy
stocks, bonds, or other financial assets that they hold. For example, if you want to and sell securities for customers and
hold inventories of stocks, bonds, or
buy some shares of stock, the dealer will sell you shares that it owns. If you want to
other financial assets
sell some shares, the dealer will buy them. The dealer seeks to make a profit not
only on commission charges but also on the difference between the price it paid to
buy securities and the price at which it sells them.
Brokers and dealers are different from other investment managers in that they
will buy and sell individual bonds and stocks for customers. Special types of orders limit order A securities transaction that
sets a specific buy-or-sell price to
are allowed. For example, a limit order can be placed that sets a specific buy-or-sell
execute a buy-or-sell order for a
price to execute a transaction. If the price moves up to a certain level, the securities security

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