Investment Banking- An eye candy occupation

As we all know a bank is a financial institution licensed to receive deposits and make loans. Banks many also provide financial services, such as wealth management, currency exchange and safe deposit boxes. There are two types of banks: Commercial/ retail banks and investment banks.

In this piece of article we will be focusing on Investment bank and its various facets as a career.

Investment banks focus on providing corporate clients with services such as underwriting and assisting with merger and acquisition activity. Some famous examples of investment banks are Goldman Sachs Group Inc, Morgan Stanley, Deutsche Bank, America Merril Lynch etc.

An investment banker is an individual who works in a investment bank and facilitating his clients in broad business decisions like raising of capital, mergers and acquisitions advice, spin-off or reorganization advice, advice as to how much a company is worth and how best to structure a deal, pricing financial instruments so as to maximize revenue in coordination with the regulatory requirements and compliance of governance culture of present era etc. However in smaller organizations that do not have a specific investment banking arm, corporate finance staff may fulfill the duties of investment bankers.

Although the above definition is a simplistic one our piece of article will be a detailed one discussed below following its high impact on youth as a career and the nitty gritties associated with it.

The Role of an Investment Banker

Investment bankers are an expert in his or her field who has a finger on the pulse of the current investing climate, so businesses and institutions turn to investment bankers for advice on how best to plan their development as they can tailor their expertise to their recommends to the present state of economic conditions. They are the bridge way and serves as a facilitator between a company and investors when the company wants to issue stock or bonds.

In a capitalist economy, investment bankers play a role in helping their clients raise capital to finance various activities and grow their businesses. They are financial advisory intermediaries who help price capital and allocate it to various uses. While this activity helps smooth the wheels of capitalism, the role of investment bankers has come under scrutiny as there is some criticism that they are paid too much in relation to the service they provide.

Perhaps no other organization inspires as much awe, intrigue, controversy and curiosity as the global investment bank. Investment banks have a storied history and today, they sit astride the fast-paced flow of global trade and capital

Investment bankers tend to make huge money associated with high risk as well at the time when a company holds its initial public offering (IPO). They will buy all or much of the company’s shares directly from the company and subsequently as proxy for the company holding the IPO, they will sell the shares on the market. This makes things much easier for the company itself, as they effectively contract out the IPO to the investment bank and they stands to make profit as it will generally price its shares at a markup from the price it initially paid but the vice versa can also happen if the deal turns out to be overvalued the stock as in this case they will often have to sell the stock for less than they initially paid for it and hence experienced analysts at the investment bank can use their expertise to accurately price the stock as best they can.

The investment banking field has gained some notoriety over the years because investment bankers are generally very well-paid individuals. Yet, these positions require specific skills, like excellent number-crunching abilities, strong verbal and written communication skills, and the capacity to work very long and grueling hours. Educational requirements usually include an MBA from a top-notch institution and potentially the Chartered Financial Analyst designation as well.

Additionally, investment bankers must be very trustworthy. Since investment bankers can come across highly confidential information on companies in the course of their duties, their ability to respect the confidentiality of such information and not use it for their own benefit or for the benefit of their family and friends is of the utmost importance. As such, investment bankers must abide by their firm’s stipulated code of conduct and will generally sign a confidentially agreement. This code usually contains very restrictive clauses on such matters as the treatment of confidential information. Moreover, there is potential for a conflict of interest if the advisory and trading divisions of investment banks interact, since investment banks generally do business both for themselves and for external clients. As such, the code will often restrict the investment banker’s contact with other employees of the firm, especially in these areas.

There is a typical hierarchy of positions  in investment banking, which is as follows, from most junior to most senior: Analyst, Associate, Vice President, Senior Vice President, Managing Director.

While investment bankers often work on large asset management projects with other companies, they may engage in wealth management for individuals as well and the percentage of commission earned by them in the deals when cracked is voluminous and hence is always an eye candy job for all those youngsters who are risk takers in this paradigm shift of start-ups and business behavior as well.

Taking into account the current investing climate, the bank will recommend the best way to raise funds. This could entail selling an ownership stake in the company through a stock offer or borrowing from the public through a bond issue. The investment firm can also help determine how to price these instruments by utilizing sophisticated financial models.

In the case of a stock offering, its financial analysts will look at a variety of different factors – such as earnings potential and the strength of the management team – to estimate how much a share of the company is worth. If the client is offering bonds, the bank will look at prevailing interests rate for similarly rated businesses to figure out how much it will have to compensate borrowers.

Investment banks also offer advice in a merger or acquisition scenario. For example, if a business is looking to purchase a competitor, the bank can advise its management team on how much the company is worth and how to structure the deal in a way that’s favorable to the buyer.

Underwriting stocks and bonds

If an entity decides to raise funds through an equity or debt offering, one or more investment banks will also underwrite the securities. This means the institution buys a certain number of shares – or bonds – at a predetermined price and re-sells them through an exchange.

While advising companies and helping them raise money is an important part of what Wall Street firms do, most perform a number of other functions as well. In fact, most major banks are highly diversified in terms of the services they offer. Some of their other income sources include:

• Research– Larger investment banks have large teams that gather information about companies and offer recommendations on whether to buy or sell their stock. They may use these reports internally but can also generate revenue by selling them to hedge funds and mutual fund managers.
• Trading and Sales – Most major firms have a trading department that can execute stock and bond transactions on behalf of their clients.
• Asset Management– The likes of J. P. Morgan and Goldman Sachs manage huge portfolios for pension funds, foundations and insurance companies through their asset management department. Their experts help select the right mix of stocks, debt instruments, real estate, trusts and other investment vehicles to achieve their clients’ unique goals.
• Wealth Management– Some of the same banks that perform investment banking functions for Fortune 500 businesses also cater to everyday investors. Through a team of financial advisors, they help individuals and families save for retirement and other long-term needs.
• Securitized Products– These days, companies often pool financial assets – from mortgages to credit card receivables – and sell them off to investors as a fixed-income products. An investment bank will recommend opportunities to “securitize” income streams, assemble the assets and market them to institutional investors.

Investment banks are designed to finance or facilitate trade and investment on a large scale. But that’s a simplistic view of how investment banks make money. There’s a lot more to what they really do. When they work properly, these services make markets more liquid, reduce uncertainty and get rid of inefficiencies by smoothing out spreads.

Swaps

Investment bankers sometimes make money through swaps. Swaps create profit opportunities through a complicated form of arbitrage, where the investment bank brokers a deal between two parties that are trading their respective cash flows. The most common swaps occur whenever two parties realize they might mutually benefit from a change in a benchmark, such as interest rates or exchange rates.

Market Making

Market making works best when the bank has a large inventory of stock with high trade frequency. The bank can quote a buy price and sell price and earn the small difference between the two prices, also known as the bid-ask spread.

Asset Management

In other cases, investment banks directly serve as asset managers to large clients. The bank might have internal fund departments, including internal hedge funds, which often come with attractive fee structures. Asset management can be quite lucrative because the client portfolios are large.

Investment banks also partner with or create venture capital or private equity funds to raise money and invest in private assets. These are the fix-and-flip experts in the business governance world. The idea is to buy a promising target company, often with a lot of leverage, and then resell or take the company public after it becomes more valuable.

Conclusion:

Drawn by the allure of high salaries and copious cachet, young, aggressive, ambitious finance students right out of college often gravitate to investment banking. Moreover, investment banking often serves as a springboard to even more lucrative and prestigious careers, such as venture capital, private equity and wealth management. A common misconception is that anyone great with numbers is well suited to be an investment banker. Though quantitative acumen is a fantastic trait to have, it by no means unilaterally predicts success in investment banking. The best investment bankers, along with being math whizzes, are persuasive, aggressive, quick-witted and have unflappable work ethics. A good way for those interested in the field to gain experience and make professional contacts before landing a job is to complete an internship. Investment banks regularly take on undergraduate and graduate interns and provide them with training and mentor ship. Interns typically perform the same kinds of duties that analysts and associates perform, including gathering data, working with financial models, and interacting with clients.

While entry-level investment banking analyst positions require only a bachelor’s degree, many investment bankers pursue graduate degrees. Master of Business Administration degrees (MBAs) are most common among investment bankers, but other graduate degrees, like law degrees, can be useful as well. Many schools offer graduate programs in financial mathematics, and a master’s degree in this field can also be valuable for investment bankers.

As investment bankers move up the hierarchy of their bank, their base salary increases, but their potential for bonus earnings increases much more.

Disclaimer: This is only a knowledge sharing initiative and author does not intend to solicit any business or profession. I assume no responsibility for the consequences of use of such information.

About the author: Miss Suman Gupta is a Company secretary from Guwahati region of India. She is into whole time employment in a company with a post qualification experience of three plus years. She can be reached out at guptacssuman@gmail.com. Any suggestions or queries can be mailed.