What it is:
How it works (Example):
When a company plans to raise capital funds by issuing new shares of stock, investment bankers take on the role of intermediary between the company and the investors who may want to buy the stock. This process is called underwriting and is usually carried out by several investment bankers who are employed by and work as agents for an investment bank participating in an underwriting syndicate.
To illustrate, suppose company XYZ needs to raise extra capital for their operations. They decide to issue a new line of stock called XYZ Premium Shares. Company XYZ subsequently solicits an investment bank whose employees market the new shares of stock to existing clients and other prospective investors. Additionally, these investment bankers will often solicit other investment banks to participate in the deal in order to form the underwriting syndicate. In selling the new shares of stock, the investment bankers are helping company XYZ to access the capital markets and thereby raise the capital funds it intended to raise by issuing the new stock.
Why it Matters:
Companies that plan to raise funds through initial public offerings (IPOs) usually do not have the expertise or the authority to issue shares of stock directly to the public. Investment bankers possess the marketing and financial expertise to successfully manage a company's stock offering in order to raise capital from the capital markets.