What is Sales and Trading?
Sales and Trading is one of the main functions performed by the investment bank in the country where the investment banking sales team pitch clients for trading ideas and the traders team who perform the activities related to the purchase and sell of the securities and the other financial instruments in the market for itself or on behalf of its clients.
It is the 4th out of the 9 series video article on Investment Banking overview.
- Part 1 – Investment Banking vs. Commercial Banking
- Part 2 – Equity Research
- Part 3 – What is Asset Management Company
- Part 4 – Sales and Trading
- Part 5 – Private Placements
- Part 6 – Underwriters
- Part 7 – Mergers and Acquisitions
- Part 8 – Restructuring and Reorganization
- Part 9 – Investment Banking Responsibilities
If you want to learn Mergers and Acquisitions professionally, then you may want to look at 25+ video hours of M&A (Mergers and Acquisitions) Training.
In this, we discuss the following –
- What is Sales and Trading in Investment Banking?
- Sales Department Function in Investment Banking
- Trading Department Function in Investment Banking
Sales and Trading Transcript
What is Sales and Trading in Investment Banking?
Equity ResearchEquity ResearchEquity Research refers to the study of a business, i.e., analyzing a company's financials, performing Ratio Analysis, Financial forecasting in Excel (Financial Modeling), & exploring scenarios to make insightful BUY/HOLD/SELL stock investment recommendations. Moreover, the Equity Research Analysts discuss their findings & details in the Equity Research Reports. and sales and trading division play a vital role, and they work in a very integrated fashion. So, it is equally crucial for us to understand what is meant by sales and what is meant by trading because this is the heart and soul of research and trading making money for the investment bank. So let us now look at how the Sales and trading department within the investment banking firm works. So we are talking about an investment bank which is an integrated investment bank where there is a research department as well as a sales and trading department. So what happens is when the research department comes out with its own set of reports, the buy and sell on specific stocks, they talk to the institutional investors, or they send their set of equity reports first thing in the morning to the investors. Now the institutional investors may get convinced with the idea of trading on such securities because they may believe in the recommendation of the research department. They may look forward to executing certain trades, so say, for example, a particular Mutual FundMutual FundA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks. may be interested in buying Microsoft Stock of let’s say to the extent of 10 million Dollars. Hence, what happens is that when these large deals happen, 10 Million Dollars, 20 Million Dollars, etc. what investment bank must do is they must try to match the buyers with the seller without affecting the actual execution price to a greater extent. So let say if there is an order of 100 Million Dollars on Microsoft i.e., specifically huge order. If it’s start getting executed by orders, obviously the share price will go up and up because they would be few sellers. However, the buying momentum is still on; it may reflect that Microsoft price may jump by 5% or 10%, or I am just speculating on that part, but yes, it may jump. So what an investment bank does in between is that they match the buyers and the sellers and try to keep the execution price or the price at which they will buy at a minimum. Now they also actually buy and sell securities out of their account for facilitating the trading of the securities sometimes.
Sales Department in Investment Banking
So let’s look at exactly how the sales department now functions. So there are 2 separate mini divisions within the sales and trading division; one thinks of it as the sales department. Hence, what happens within the sales department is that think of a research division coming out with their calls first thing in the morning before the market starts, so what this sales guy may do is they attend something called a morning meeting. Now, what does morning meeting is all about is that the research and the head of research, as well as sales and the sales staff, would attend the meeting to understand what is the actual calls for the day. So say, for example, as I said, Microsoft may be a buy, so they here the analyst out with respect to why it would buy or sell the sales and trading job is basically to talk to these institutional investors them and tell them that your particular stock moves up or probably it may move down. So the portfolio managerThe Portfolio ManagerA Portfolio Manager is an executive responsible for making investment decisions & handle investment portfolios for fulfilling the client’s investment-related objectives. Also, he/she works towards maximizing the benefits & minimizing the potential risks for clients. in written may think about executing certain trades on the direction of sales from the investment banks, so that’s how basically the sales guys work. In between the sales, guys are also responsible for constant communication between the research analyst as well as the trader from the investment bank. Hence, as I said research analyst is someone who prepares the research report, buy-sell recommendation; the sales staff hear those recommendations and talk to the portfolio managers. Let say if there is a 10 million Dollar, 20 Million Dollar trade to be executed, the sales staff then passes this trade to the traders from the investment banks, so this is a trading division.
Trading Department in Investment Banking
Let’s see how trading functions. Now, what is the objective of trading essentially? As I said, earlier traders need to execute the trade that is buying or sell the securities on behalf of institutional clients and ensure that the execution price is at the minimal. So they are the one who constantly looks at the price charts minute by minute and they are totally using Bloomberg terminals they are on the trading terminals doing those set of executions. They trade on the behalf of their own institutional clients in many of the traders, in fact, are kind of sector experts some of them specializing technology stocks, the other may be FMCG, Pharma, etc. so this is the overall sales and trading job, trader find minimum execution price for the institutional investorsInstitutional InvestorsInstitutional investors are entities that pool money from a variety of investors and individuals to create a large sum that is then handed to investment managers who invest it in a variety of assets, shares, and securities. Banks, NBFCs, mutual funds, pension funds, and hedge funds are all examples..