In most large corporations, investment bankers help manage the finances. Whether a company is issuing equity, developing cutting-edge technology, or looking to finance a business expansion or other major investment, investment bankers provide the services and support to make it happen.
This article explains critically what investment banking entails and how it works. As you read this article, you will always understand the unique structures of investment banking, its various aspects, and much 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 a point of contact for securities issuers and investors and support new companies with their IPO. They either buy all available shares at a price set by their experts or sell them to the public, or they sell shares on behalf of the issuer and receive a commission for each share sold.
Understand investment banking
Investment banks underwrite new debt and equity securities for many companies, assist in sales of securities, and facilitate mergers and acquisitions, restructurings, and brokerage deals for both institutional and individual investors. Investment banks also advise issuers on the issue and placement of shares.
Many large investment banking systems are affiliated with, or subsidiaries of, larger banking institutions, and many of these have become household names, the most notable being Goldman Sachs , Morgan Stanley, JPMorgan Chase, Bank of America Merrill Lynch, and Deutsche Bank.
Investment banks offer help with large, complex financial transactions. When the investment banker’s client is considering an acquisition, merger or divestment, they can offer advice on the value of a company and how to structure a deal. It may also include issuing securities to raise funds for customer groups and preparing SEC filings required for a company’s IPO.
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.
What are the aspects of investment banking?
Two main areas of interest in investment banking for graduates are typically Mergers & Acquisitions (M&A) and trading for own account.
1. Mergers and Acquisitions
M&A refers to the merging of different companies. A merger is the joining of two companies into a new one. An acquisition is when one company buys another but no new ones are formed.
2. Dealing on own account
This is when a bank acts on its own account in order to gain its own advantage. This may involve taking analytical positions within carefully calculated and controlled limits so as not to expose the bank to dangerous risks. In recent years, the growth of this aspect of investment banking has led to increased risk taking and sometimes significant losses.
Access to significant amounts of capital is essential to fund a large-scale expansion or development; Selling securities to a wide range of investors and potentially in multiple markets in different countries is an efficient way to raise large amounts of capital without exposing investors to undue risk.
What Are the Selling Skills Needed to Become an Investment Banker?
An investment banker’s compensation largely depends on the skills an individual brings to the position, both 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 four key skills you need to succeed in investment banking:
1. Team leadership
Because investment bankers often work in ad hoc teams composed of employees, client managers, and other third parties, they must be able to coordinate and direct the efforts of different teams. Leadership experience can be gained through:
- Participation in projects during the course
- Earn professional certifications that include leadership components
- Volunteering for non-profit organizations to support businesses
2. Experience in Mergers & Acquisitions
The preparation and implementation of a merger or takeover usually takes a lot of time and effort. Investment bankers can gain M&A experience by joining a team that is on the sell-side or buy-side of the transaction.
The role of the investment banker differs depending on what industry the investment banker is in. In both cases, however, some skills are important. Investment bankers should:
- Find out about market and industry trends
- Understand the bidding process and strategies
- Know how to perform financial analysis of capital structures and financial forecasts
3. Investment Management
Investment managers help companies ensure their finances are managed efficiently and in a manner that contributes to business objectives. The required expertise increases investment bankers’ career prospects by providing information about the processes of financial management of companies.
Mergers & Inquisitions describes the various routes to an investment banking career, one of which consists of ‘stepping stone’ internships or jobs in banks, corporate finance departments or small private equity/venture capital firms for acquisition.
Banks offer many positions that raise an investment banking candidate’s profile by providing skills and hands-on experience working with corporate clients. They also share many of the analytical tools and financial management processes that investment bankers rely on to do their jobs.
What is the investment bank structure?
Investment banks are often divided into two parts: the “buy side” and the “sell side”. The “buy-side” works with pension funds, mutual funds, and hedge funds, helping investment institutions maximize their returns when trading/investing in securities, such as stocks and bonds . “Sell-side” generally refers to selling recently issued IPO shares, placing new bonds, providing market-making services, or helping clients complete transactions. Market making is about holding stocks to enable trading – to be 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
The investment bank’s services at the headquarters usually involve direct cooperation with clients and market participants. Activities include mergers and acquisitions, corporate finance and professional investment management for wealthy individuals or institutions, professional analysis of companies and markets, and the formulation of investment strategies.
2. Middle office
Middle office investment banking services include specialized activities such as treasury, compliance and regulatory restrictions for professional clients, and risk management. This includes cash flow: monitoring the company’s cash inflows and outflows; which determines how much capital the company must hold in order to avoid financial difficulties. This flows back into the activities of the head office by determining its scope for action.
3. Back office
Back office investment banking services include the operational activities that enable banks to operate efficiently. They handle things like trade confirmations, making sure the right securities are being bought, sold and settled with the right amounts. It is also responsible for the software and technology platforms that allow traders to get their jobs done; Make sure they are the latest models and features, create new trading algorithms and more.
Entry into investment banking
Anyone wondering how to get into 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 hands-on work experience in this 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.
Certifications and credentials required to become an investment banker
Before you can work as an investment banker or broker, you must register with the Financial Industry Regulatory Authority (FINRA). In order 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 is a list of other certifications that increase a person’s chances of finding a job in investment banking.
- Chartered Financial Analyst (CFA) from the CFA Institute
- Investment Banking Council of America Chartered Investment Banking Professional (CIBP).
- Investment Banking Professional Credential (IBPC) from the IBP Institute
- CFA Institute Chartered Financial Analyst
The CFA Institute outlines the four steps required to become a charterholder:
- Pass all three levels of the CFA exams, which test financial literacy and ethical and professional standards.
- Complete work experience requirements before, during, or after completion of the CFA program.
- Submit two or three letters with professional references describing work experience and professional character.
- Apply to be a titular member with qualifying professional experience as an investment manager or to become an affiliate member if you cannot meet the titular membership requirements.
Educational requirements Become an investment banker
Investment banking education typically 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, supported by organizing an internship at an investment bank during your studies.
How much does an investment banker make?
Investment banking salary levels are among the highest in the financial services industry. Investment banker salaries are affected by how long they have been in the industry and their skillset.
Investment Banking Salaries
According to the U.S. Bureau of Labor Statistics (BLS) , the median annual salary for securities, commodity and financial services salespeople as of May 2020 was $64,770 per year and $31.14 per hour. However, according to the BLS, agents working with securities, commodity contracts and other financial assets earn an average annual salary of $86,840.
According to the BLS, investment bankers specializing in corporate finance and mergers & acquisitions can expect a substantial bonus. The bonus for senior positions in investment banking can be higher than the annual salary.
According to Pay Scale , the median annual salary for investment bankers is around $100,000 in June 2020. Pay Scale provides the following examples of typical compensation (salary and bonus) for investment bankers at different career stages:
- $76,000 is the starting salary.
- $91,000 with one to four years of experience
- $125,000 for those five to nine years of experience
- $146,000 for those 10-19 years of experience
Frequently asked questions about investment banking
What is investment banking?
Investment banking is a specialized branch of banking that relates 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 the risks associated with the project before the client moves forward.
How much do investment bankers make?
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 hot on their heels, including Deutsche Bank, Barclays, Credit Suisse and UBS.
Investment bankers play a role in helping their clients raise capital to fund various activities and grow their businesses. They are financial advisory brokers that help corporations and governments raise money for various causes.
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 money-raising process.