Investment banking is an important aspect of a global financial system, but it has often been misunderstood as a complex and intricate world of top financial players. It would rather say that investment banking is an integral part of the financial structures that help businesses, governments, and even individuals achieve financial goals.
This is for anyone interested in knowing what investment banking is really like as a career option and its functions and roles in the economy.
Table of Contents
This article will distribute everything into digestible segments. What investment banking is, therefore, and how it works, and why it is important.
Basic Definition of Investment Banking
An investment bank is one of the types of financial institutions whose primary purpose is to assist companies and governments in obtaining the long-term funds needed for their operations. (Fohlin, 2014) J.P. Morgan Chase, Goldman Sachs, Morgan Stanley, Barclays Capital, CitiGroup, Bank of America Merrill Lynch, and Deutsche Bank are some top investment banks globally.
Helping clients raise capital, providing financial advice, and facilitating M&A (mergers and acquisitions) activities are at the heart of investment banking. It acts as a medium between businesses whose capital requirements are not met by investors who want returns by offering their capital.
Investment banks are best considered as financial engineers that build strategies; develop products; and allow the movement of businesses into new territories.
Core Functions of Investment Banking
Some major works carried out by investment banks fall under these broad classifications:
1. Fundraising
The public role in the local business entails assisting it with mobilization through the market in debt and equity. This is:
- Initial Public Offering (IPO): The investment banks facilitate public-listing companies that want to convert into publicly traded companies by issuance of shares through the stock exchange.
- Debt Capital Raising: Bonds or loans sanctioned to corporates by banks that secure debt capital for operational purposes.
- Institutional Offerings: Investment banks engage business organizations with private investors which the public market cannot access.
2. Mergers & Acquisitions
Investment banks are intermediaries in mergers, acquisitions, and restructurings and also assist clients in identifying opportunities for such activities, valuing them, and negotiating deals.
- Buyer-Side Representation: If a company is interested in acquiring another business.
- Seller-Side M&A Advisory: If a company seeks to sell itself or merge with another company.
Take the Lead in Shaping the Future of Investment Banking
Master Investment Banking with Our Executive Post Graduate Certification in Investment Banking
3. Financial Consulting Services
The investment banks are rooted in providing advice on all matters related to finance, forecast market trends, and long-term planning. It optimizes capital structure for businesses while helping them make fact-based decisions.
4. Capital Commitment
An investment bank purchases securities. This means that it will take the risk of buying shares or debentures from a company, which it will then sell to the investors that it represents. By so doing, the bank becomes a bridge between the issuers and investors to get quick access to funds for businesses.
5. Market Analysis & Trading
There are many investment banks that actively maintain a trading desk to conduct all necessary financial activities of buying, selling, or trading in stocks, bonds, derivatives, and other financial assets either on behalf of their customers or for making profits on their own account. They also do in-depth research analysis to derive insights into market trends.
How Investment Banking Works?
Investment banks have two clear-cut divisions functioning as below:
1. Corporate Advisory
This is a division assisting corporate clients in capital raising, mergers and acquisitions, and in providing financial advisory services. This usually involves the following activities:
- Understanding what the client wants to achieve.
- Conducting extensive market research and financial analysis.
- Developing plans through which the client can expect to get the desired results.
2. Sales and Trading
The trading division is responsible for the purchase or sale of securities such as stocks, bonds, and derivatives. Investment banks, therefore, make income by:
- Liquidity Provision: Provide liquidity in the form of buying and selling securities.
- Proprietary Investment: Trade the bank’s funds for profit generation.
Multinational departments have to provide all the services to different clients, whether it is from a corporation, government, or institutional investor.
Customers of Investment Banks
There are different kinds of clients that an investment bank deals with:
- Business Corporates: For conducting any financial activity, businesses often come to investment or commercial banks to raise funds either for mergers and acquisitions or to have a better financial strategy.
- Government: The Government issues bonds and also privatizes some of the units owned by the state with the help of Investment Banks.
- Professional/Institutional Investors: Investment banks are useful in trading, research, and other investment opportunities. These big investors include mutual funds, pension funds, hedge funds, and more.
- Affluent Individuals: Such individuals often connect with investment banks for asset management and financial planning.
Building a Career in Investment Banking
If you have ever thought of pursuing investment banking as a career option, then here are a few things you must know:
Hierarchy in Investment Banking
- Analyst: This is the entry-level (financial analyst) role engaged in financial analysis, and research, and assists senior bankers.
- Associate: This is an intermediate position that supervises analysts and interacts with customers.
- Vice President (VP): This position is responsible for monitoring deals and bridging the gap between mid-level employees and seniors in management.
- Director/executive director: Responsible for the execution of deals and maintains the highest level of interaction with clients.
- Managing Director (MD): This is the top management role that has the responsibility for business acquisitions and deal closures.
If you’re aspiring to become an Investment Banker, explore our blog for a step-by-step roadmap to guide you.
Skills an Investment Banker must possess
In order to achieve success in investment banking, the following skills are necessary.
- Must possess analytical skills and have competence in quantitative matters.
- Mastering financial forecasting and estimates.
- Unmatched interaction and exhibition skills.
- Resistance is accompanied by a capacity for high-pressure work.
Educational Qualification
Investment bankers usually have a finance, economics, or business degree. Similarly, many professionals up their game with an MBA or other subjects like CFA (Chartered Financial Analyst) to have an edge on the stiff competition in getting work.
Get 100% Hike!
Master Most in Demand Skills Now!
Importance of Investment Banking
Investment banking is what drives economic development and business innovation. Here’s why it matters:
- Enabling Capital Inflow: As investment banks bridge companies to investors, businesses will receive financing for growth.
- Boosts Economic Progress: M&A’s/investment banking, advisory services in the end restructure whole industries create jobs and improve efficiency.
- Ensuring Liquidity: When markets run dry, trading desks are a source of liquidity in financial markets that investors need to trade.
- Supporting Governments: Banks for the issuance of bonds, in funds infrastructure/heath and development by governments.
Investment banking is seeing a revolution with the technical advances happening in the world. Future trends that will define it are as follows:
- Trade, Data, and Execution: Robotics /Automation/AI/Blockchain is completely changing the face of trading for data analysis execution from a paper-based culture.
- Sustainability: The increase in ESG (Environmental, Social, and Governance) driven income deals.
- Globalization: An increase in cross-border transactions necessitates know-how regarding international finance and its laws.
Conclusion
Investment banking is a major player in finance, it is what drives businesses, asset creation, and economic development.
No matter whether it is an IPO underwriting, $1B merger execution, or providing strategic financial weighting, investment banks have an important influence on how the world economy is built.
It is for you to pursue, invest wisely, and deal in the realm of finance. For those seeking a career in investment enroll in our Investment Banking course.
Investment banking is not for everyone but anyone who wants to know how finance flows, business grows and economies work.