One of the key differences b/w an Investment Bank and a Commercial Bank is that the former only deals with big market players, while the latter takes deposits from individuals rather than businesses. What if I tell you that even commercial banks are clients of these Investment banks.
An investment bank’s main objective is to provide guidance to governments and corporations on how to handle their financial issues. They are generally referred to as a bridge between any corporation and its investors.
Below mentioned topics will be covered to help you build an in-depth understanding of the important facts related to Investment banking:
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What is Investment Banking?
Investment banking is a specific branch of banking that helps businesses raise funds and provides them with financial advice and support. It provides substantial financial advising, capital raising, government and financial institution services, financial and risk management services, and help to enterprises.
An investment bank is a type of financial services firm that serves as a middleman in large and sophisticated financial transactions. When a new firm is ready to launch its initial public offering (IPO) or when a company combines with a rival, an investment bank is approached. For large institutional clients like pension funds, it also serves as a broker or financial adviser.
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What do Investment Banks do?
Let’s begin with a simple example of a company named “ABC”, suppose ABC wants to merge with another company! How will it know that the other company will be beneficial for it?
Or, how is it going to raise the desired funds?
And, who is going to handle the complete documentation and help in figuring out new investment plans?
Well, the short answer to all these questions is an Investment Bank! Investment banks play a vital role in making a company go big by acting as a “Risk Taker” or say, Middleman.
When small or mid-size companies plan to go public by launching their IPO ( initial public offering ) they reach out to reputed Investment banks for their services.
Typically, investment banking focuses on two main areas:
| M&A advisory | Underwriting |
| Mergers and acquisitions (M&A) advisory is the process of assisting corporations and institutions in locating, evaluating, and completing company acquisitions. | Underwriting is the procedure used by banks to get funds from investors for a client mostly in the form of equity or debt securities. |
How do Investment Banks work?
Investment banks are divided into two types:
- Sell-side – The sell-side sells shares of newly issued IPOs, provides market-making services, places new bond issues, and assists customers with transactions.
- Buy-side – The buy-side, on the other hand, trades securities such as shares and bonds in order to maximize profits. It collaborates with hedge funds, mutual funds, and pension funds.
Let’s try to understand with an example:
Let’s consider a situation where a company ABC wants to buy its competitor XYZ. But ABC can’t figure out how much XYZ is really worth and is also interested in knowing the acquisition’s future prospects.
Now comes the time for investment bankers to step into the game. ABC seeks the services of an investment bank not for advice purposes but also to conduct the full transaction. Beginning with XYZ analysis and progressing to value, competitor analysis, and future growth.
The entire investment process now will be handled by the investment bank. It will not only be helping ABC with the necessary paperwork, but it will also assist in closing the deal and will even recommend a suitable time for the deal to occur.
It should also be noted that in this case, the investment bank is on the buy side. On the sell-side of the same deal, another investment bank will also be involved.
The larger the deal, the higher will be the commission charged by the investment bank.
Investment banks play an important role in assisting various organizations in obtaining capital funding and making wise financial decisions. They also conduct financial analyses of the businesses to aid their clients in making future decisions.
Skills Required for Investment Banking
It demands a lot of financial modeling and valuation. Investment Banking Analysts and Associates spend a lot of time in Excel creating financial models and utilizing various valuation techniques to advise their clients and close agreements, whether for underwriting or M&A activity.
Below are a few Investment Banking skills that are required
- Financial modelling: Financial modelling is an abstraction of a real corporation created using spreadsheets that helps in determining the future cash flows, financing needs, whether or not to invest in the business, and valuation; models are also used to determine whether or not acquisitions and the creation of new assets is possible.
In an investment bank, relationship managers are part of the investment management team.
This is where a group of personable and client-facing experts collaborate to deliver specialized advice to the bank’s client network, which ranges from extremely prosperous individuals (super-wealthy individuals) through governments to financial organizations such as trusts, pension funds, and insurance companies.
Private wealth managers on the team will typically deal with high-net-worth individuals, as well as the organizations and families affiliated with them.
When a client opens an account with an investment bank or contacts them for services, they are often given a single relationship manager.
A relationship manager is tasked with developing close relationships with each of their clients.
A business valuation is a process of assessing the economic value of an entire firm or company unit. Business valuation can be used to evaluate the fair value of a company for a variety of purposes, including sale value, partner ownership, taxation, and even divorce processes.
For an unbiased assessment of the value of their company, owners frequently turn to qualified business evaluators.
Negotiation is the process through which parties reach a mutual understanding and reach a mutual conclusion without the intervention of a third party.
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Commercial banks vs Investment banks
Whenever you’ll hear the term Bank, your brain will automatically redirect you to a system in which money depositing and withdrawals take place, this is actually how a commercial bank functions, and for most common people is the only bank that exists.
To create a line of difference between Investment banks and commercial banks we will now be talking about the differences these banking systems carry.
#1. Major Customers
#2. Primary Services Offered
#3. Secondary Services
#4. Ways to Earn Profit
#5. Risk Level
#6. Examples
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Benefits of Investment Banking
As previously said, there are multiple ways in which investment banking supports huge corporations in making key financial decisions and earning maximum rewards.
Due to this, investment banks are well-liked financial institutions among businesses and even governments. In this sense, we can say that investment banking and investment banks provide a number of advantages that major organizations and enterprises can make use of.
A few of the advantages are as follows:
- Investment banks efficiently handle their clients and provide them with essential information about the risks and rewards of their investments in other firms or organizations.
- These banks function as a middleman between both the company and the investor, ensuring a rise in financial capital by assisting in significant financial investments such as acquisitions or mergers.
- It conducts thorough research on the deal and project that its client intends to pursue in order to ensure that the client’s money is put in a secure place, hence reducing the risks associated with the deal or project.
Careers in Investment Banking
Investment banking jobs are among the most desirable jobs in the financial Industry. As an Investment banker, you will be expected to assist the clients in raising funds and expanding their business.
Though, it’s not that easy to get into the domain, once you make it through the journey the results are really rewarding.
The average salary ranges around $100K, and with years of experience, you can even earn up to half a million dollars per annum.
Let’s take a look at some designations with their pay scale:
| Job Profile | Base Pay | Bonus | Total Salary |
| Analyst | $80k-$100k | $50k-$100k | $125k – $200k |
| Associate | $100k – $120k | $80k – $130k | $180k – $250k |
| Vice President | $120k – $150k | $100k – $250k | $220k – $400k |
| Managing Director | $300k – $1M | $200k – $10M+ | $500k – $10M+ |
That’s a lot of money! Isn’t it?
It’s not just the money factor that professionals enjoy doing Investment Banking jobs, apart from a secure financial life other perks enjoyed by i-bankers include:
- Global opportunities
- Powerful networking
- Amazing travel benefits like staying in five or seven-star hotels and traveling in business class.
- Free dinner if you work past 8 pm and chauffeur dropping you home if you work past 10 pm.
It is important for you to know a few downsides of this career option which involve:
- Very long working hours
- Extremely high competition
- You should always be available as per clients’ demands
Interested in knowing how much an Investment Banker can earn in India, then go through the Investment Banking Salary in India Blog.
Conclusion
The main role that Investment Banking demands is to provide assistance to firms, governments, and wealthy individuals in expanding their businesses by acting as a medium that will handle the complete procedure of analyzing, and evaluating the business and will also manage all the documentation work involved in the process.
The world of Investment Banking is not for everyone to live in, this job profile comes with very high competition and extremely tight working hours.
But, the financial perks offered are unparalleled, you live a very fast-paced life, and deal with exquisite clients while enjoying a lifestyle that others can only think of.
Go through the How to Become an Investment Banker blog to know how to become one.