What Is Investment Banking And How Does It Work?

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In most big companies, investment bankers help to manage finances. Whether a company is issuing stocks, developing cutting-edge technology, or looking to finance a facility expansion or other enormous capital investment, investment bankers offer the services and support to make it possible.

This article critically explains what investment banking entails and how it works. By reading this article, you’ll always get to understand the unique structures of investment banking, its different aspects, and lots more.

What Is Investment Banking?

Investment banking is a subset of banking that assists individuals and organizations in raising capital and providing financial advice.

They act as The Go-Betweens for security issuers and investors, and they assist new companies in going public. They either buy all available shares at a price determined by their experts or resell them to the public, or they sell shares on behalf of the issuer and earn a commission on each share sold.

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Understanding Investment Banking

Investment banks underwrite new debt and equity securities for many corporations, assist in securities sales, and facilitate mergers and acquisitions, reorganizations, and broker trades for both institutional and private investors. Investment banks also advise issuers on the issuance and placement of stock.

Many large investment banking systems are affiliated with or subsidiaries of larger banking institutions, and many of them have become household names, the most prominent of which are Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America Merrill Lynch, and Deutsche Bank.

Investment banks provide help in large, complex financial transactions. If the investment banker’s client is considering an acquisition, merger, or sale, they may offer advice on how much a company is worth and how to structure a deal. It may also include the issuance of securities to raise funds for client groups and preparing documentation for the Securities and Exchange Commission (SEC) required for a company to go public.

Investment banks employ investment bankers who assist corporations, governments, and other groups in planning and managing large projects, saving their clients time and money by identifying project risks before the client.

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What Are The Aspects of Investment Banking?

Two major areas of interest in investment banking for graduates are typically mergers and acquisitions (M&A) and trading on your own account.

1. Mergers and Acquisitions

M&A refers to the consolidation of various companies. A merger is the merger of two companies into a new one. An acquisition occurs when one company buys another, but no new ones are created.

2. Trading on its own account

This is understood to mean when a bank acts on its own account in order to get its own benefit. This may include taking analytical positions within carefully calculated and controlled limits to avoid exposing the bank to dangerous risks. In recent years, the growth of this aspect of investment banking has resulted in an increased appetite for risk and, sometimes, significant losses.

Access to substantial amounts of capital is essential to finance large-scale expansion or development; Selling securities to a wide range of investors, and possibly in several markets in different countries, is an efficient way to raise large amounts of capital without exposing investors to undue risk.

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What Are The High-selling Skills Needed To Become An Investment Banker?

An investment banker’s compensation depends largely on the skills that an individual brings to the position within and outside of the financial services industry. In addition to business knowledge, investment bankers must have analytical skills, time and project management experience, and strong interpersonal skills. Here are the top four skills needed to be successful in investment banking:

1. Team Leadership

Because investment bankers often work in ad-hoc teams comprised of employees, client executives, and other third parties, they need to be able to coordinate and direct the efforts of different teams. Leadership experience can be acquired through:

  • Participation in projects during your studies
  • Acquire professional certificates that include leadership components
  • Volunteering for non-profit organizations to support companies

2. Experience in mergers and acquisitions

Preparation and implementation of a company merger or acquisition generally take a lot of time and effort. Investment bankers can gain experience with mergers and acquisitions by joining a team that is on the seller’s or buyer’s side of the transaction.

The role of the investment banker differs depending on which side of the business the investment banker is on. However, some skills are important in both cases. Investment bankers should:

  • Be up-to-date on market and industry trends
  • Understand the bidding process and strategies
  • Know how to perform financial analysis of capital structures and financial projections

3. Investment Management

Investment managers help companies ensure that their finances are managed efficiently and in a way that contributes to business objectives. The level of expertise required enhances investment bankers’ career opportunities by providing information on corporate financial management processes.

Financial analysis and analysis tools to manage corporate finances can also be used in investment banking tasks, such as pricing new stocks and bonds, calculating the value of an acquisition target, and determining risk and potential.

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4. Banking Experience

Mergers & Inquisitions describes the different paths to a career as an investment banker, one of which consists of “springboard” internships or jobs in banks, corporate finance departments, or small private equity/venture capital firms for acquire.

Banks offer many positions that enhance the profile of an investment banking candidate by providing skills and practical experience working with corporate clients. They also share many of the analytical tools and financial management processes that investment bankers rely on in their work.

What Is The Investment Bank Structure?

Investment banks are often divided into two divisions: the “buyer’s side” and the “seller’s side.” The “buyer-side” works with pension funds, mutual funds, and hedge funds and helps investment institutions to maximize their returns when trading/investing in securities such as stocks and bonds. The “seller’s side” generally refers to selling recently issued IPO shares, placing new bonds, providing market-making services, or helping clients process transactions. Market making is about holding stocks to enable trading – being able to bid and sell stocks.

The activities of many investment banks are also divided into three categories: front office, middle office, or back office.

1. Front Office

Head office investment bank services generally include direct cooperation with clients and market participants. Activities include mergers and acquisitions, corporate finance and professional investment management for high net worth individuals or institutions, professional analysis of companies and markets, and formulation of investment strategies.

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 2. Middle Office

Middle Office Investment banking services include specialized activities such as treasury, compliance and government restrictions for professional clients, and risk management. This also includes the flow of funds: monitoring the company’s incoming and outgoing funds; which determines how much capital the company must retain to avoid financial difficulties. This flows back to the activities of the main office by determining the scope of what they can do.

3. Back Office

Back Office Investment banking services comprise the operating activities that enable banks to operate efficiently. They take care of things like trade confirmations, making sure the right securities are bought, sold, and settled for the correct amounts. It is also responsible for the software and technology platforms that allow merchants to do their work; Make sure they are the latest models and features, and create new trading algorithms and more.

How to Enter Investment Banking

Anyone wondering how to enter investment banking should know that the process begins with earning a bachelor’s degree in finance, economics, or a related field. The next steps are to gain practical work experience in the field and become a CFA Institute certified Chartered Financial Analyst, along with other investment banking certifications. A master’s degree in finance is also valuable.

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Certifications and credentials needed to become an investent banker

Before you can work as an investment banker or broker, you must register with the Financial Industry Regulatory Authority (FINRA). To obtain the license, you must pass a series of exams.

Additional licenses are required to sell certain investment products and services, and renewing a FINRA license includes attending continuing education courses.

Here’s a list of other certifications that increases a person’s chances of finding a position in investment banking.

  • Chartered Financial Analyst (CFA) from the CFA Institute
  • Chartered Investment Banking Professional (CIBP) from the Investment Banking Council of America
  • Investment Banking Professional Credential (IBPC) from the IBP Institute
  • CFA Institute Chartered Financial Analyst

The CFA Institute describes the four steps required to become a charter holder:

  • Pass all three levels of the CFA exams that test financial knowledge as well as ethical and professional standards.
  • Complete the work experience requirements before, during, or after finishing the CFA program.
  • Submit two or three letters of professional references that detail work experience and professional character.
  • Apply to become a charterholder as a regular member with qualified work experience as an investment manager, or as an affiliate member if unable to meet the requirements to become a regular member.

Educational Requirements Needed Become An Investment Banker

Investment banking education generally begins with a bachelor’s degree in financial services, finance, or economics. The BLS states that senior positions in investment banking and other securities industries often require an MBA or other advanced degree in finance, economics, or mathematics.

One of the most important aspects of financial education is the opportunity to build a professional network that is supported by organizing an internship at an investment bank during your studies.

How Much Does An Investment Banker Earn?

Salary levels in investment banking are among the highest in the financial services industry. Investment bankers’ salaries are influenced by how long they’ve been in the industry and what skills they bring to the table.

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Salaries in Investment Banking

According to the U.S. Bureau of Labor Statistics (BLS), the median annual salary for securities, commodities, and financial services sales agents in May 2020 was $$64,770 per year and $31.14 per hour. However, according to the BLS, agents who work with securities, commodity contracts, and other financial investments earn a median annual salary of $86,840.

According to the BLS, investment bankers specializing in corporate finance and mergers and acquisitions can expect to earn a sizable bonus. The bonus for higher-level investment banking positions can be greater than the annual salary.

According to PayScale, the average annual salary for investment bankers is around $100,000 as of June 2020. PayScale provides the following examples of typical compensation (salary and bonus) for investment bankers at various stages of their careers:

  • $76,000 is the starting salary.
  • $91,000 with one to four years of experience
  • $125,000 for those with five to nine years of experience
  • $146,000 for those with 10 to 19 years of experience

FAQs On Investment Banking

What is investment banking?

Investment banking is a specific division of banking related to the creation of capital for other companies, governments, and other entities. 

What does an investment banker do?

Investment bankers help corporations, governments, and other groups plan and manage large projects, saving their clients time and money by identifying risks associated with the project before the client moves forward. 

How Much Do Investment Bankers Earn?

Successful investment bankers can earn $10 million annually.

What are the top 4 investment banks?

 The big four are JPMorgan, Goldman Sachs, Citigroup, and Morgan Stanley. Several other global giants are on their heels, including Deutsche Bank, Barclays, Credit Suisse, and UBS.

Conclusion

Investment bankers play a role in helping their clients raise capital to finance various activities and expand their businesses. They are financial advisory intermediaries who help companies and governments raise money for various uses.

While this activity helps smooth the wheels of capitalism, the investment banking industry has come under scrutiny, particularly because it plays a key role in so many elements of the process of raising money.

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