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Most people recognize the term “investment bank”, often having heard it through newspaper and television stories decrying the excess of “fat cat bankers” and “corporate greed”. Few, however, understand what investment banks actually do and how they work.
Investment banks are an essential part of the global economy. They help businesses raise capital and, in so doing, fuel economic and business growth.
If you are interested in pursuing a career in finance, or if you want to know about the opportunities available to entrepreneurs and business leaders, it is paramount that you understand how investment banks work.
In this post, we will explain what investment banks do, outline how they work and explore some of the career opportunities in this exciting financial sector.
What Is an Investment Bank?
Investment banks are financial institutions that act as middlemen between clients that want to sell financial securities and wealthy buyers, who may be high-worth individuals or organizations such as hedge fund or pension managers. While the practicalities of offering such services are complex and multifaceted, investment banking ultimately boils down to this core activity.
The term “security” refers to a tradable financial asset. Securities are usually split into three categories: debt securities, equity securities and hybrid securities (which are a mixture of debt and equity securities). Company stocks, or shares, are one of the most common types of equity securities.
Let’s say a large company wants to raise capital for growth and development by issuing and selling securities. The customer would then enlist the help of the investment bank to advise it in relation to the best types of securities to offer to the capital markets. It would then connect the business with corporate and individual buyers interested in purchasing those securities and handle all the necessary paperwork and legal responsibilities involved in the trade.
What Other Services Do Investment Banks Offer?
Other services offered by investment banks include offering impartial business advice to both investors and sellers, creating new types of financial assets, and investing private equity in third-party projects to generate revenue (although there is often a distinction between investment banks (whose role is usually advisory), and private equity firms).
Investment banks may also facilitate debt financing, as opposed to equity financing which involves purchasing long-term financial assets such as shares on the part of an investor. In debt financing, an investment bank connects a client with an investor who is willing to loan money in exchange for interest payments. The investment bank, on whom it is contingent to evaluate the “health” of potential borrowers, makes money by charging fees for its services.
Investment banks are also often involved in initial public offerings (IPOs) in an advisory capacity. An investment bank will ensure that all applicable regulations are followed when a company chooses to list on a public exchange.
How Do Investment Banks Differ from Commercial and Retail Banks?
Retail banks take deposits from individuals. In return for storing their money with a bank, these individuals receive interest payments on their savings. Retail banks also lend money to borrowers, for example, when a retail customer takes out a mortgage to purchase a house. Commercial banks operate on much of the same principle but instead deal with corporate clients such as businesses.
Investment banks, on the other hand, tend to deal with large companies that require substantial amounts of capital. Smaller businesses and early-stage startups are much more likely to seek services from commercial banks (in the form of business loans) or sell equity directly to “angel investors”.
One of the key differences between investment banks and commercial banks is that, by and large, investment banks do not lend money to clients directly. They, instead, take on an intermediary and advisory role and charge fees for their services.
What are the World’s Biggest Investment Banks?
While the day-to-day activities of investment banks are far removed from most ordinary people’s lives, these large financial institutions play a significant role in many areas of society.
Clients of investment banks include well-known retail companies, pension funds, hedge fund managers, government organizations and more. If you contribute to a pension fund or have savings in the form of investments, your financial affairs are inextricably tied up with the work of investment banks.
Here is a quick overview of the biggest investment banks in the world based on advisory fees:
- Goldman Sachs
- Morgan Stanley
- JPMorgan
- Bank of America Merrill Lynch
- Rothschild & Co
- Citi
- Evercore
- Credit Suisse
- Barclays
- UBS
What Careers Are Available in Investment Banking?
Investment banking offers several career opportunities that draw on a range of business, analytical and administrative skills. Investment bankers are also among the world’s highest earners.
Career progression in the investment banking sector generally involves the following roles:
- Analyst – Analysts are responsible for the majority of business analysis and administrative tasks.
- Associate – Associates hold more established, long-term positions that involve much of the same work as analysts but usually with more direct client contact.
- Senior Bankers – Senior bankers, including VPs (Vice Presidents) and MDs (Managing Directors), are tasked with maintaining client relationships and understanding shifts in the capital market at a high level.
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