What is Investment Banking?

What is Investment Banking?

Investment banking is a division of financial corporations that deal with the creation of new debt and security instruments, underwriting IPO processes, merge or acquire companies and help high net worth individuals and banks to facilitate high-value investments.

The moment you hear this term, many questions may arise in your mind –

But before we move on, let us first answer the most important question –

How does Investment Bank work?

What-is-Investment-Banking.

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Let us first take an analogy of a property broker to understand Investment Banking more easily.

A property broker’s job is primarily two folds –

  1. Help buyers find clients and interested sellers to buy the flat, negotiate the lowest price, do the supporting paperwork, ensure that the title is clear.
  2. Help sellers find the clients and interested buyers to sell their flat, negotiate the highest price, do the paperwork, get the registration done, etc.

So how does property broker’s earn – commissions (maybe 1% to 10% of the transaction value).

Now in this context, think about Investment Bankers as “Financial brokers.” They help companies raise capital for projects, expansion, etc. and companies may look at various channels like Initial Public Offerings (IPOs), Follow-on Public Offering (FPO), Private Placements, etc. Also, the Investment Banking jobInvestment Banking JobThe investment banking job description is a formal narrative that lists out the essential qualification, basic skills and technical skills required in a candidate to fill in the vacant investment banker position. It also explains the roles and responsibilities to be performed in this job position.read more includes Mergers and Acquisition Activities, where they play the role of Financial Brokers and help companies find suitable acquisition targets or suitable buyers for their companies.

So how does Investment Bankers earn – obviously commissions (maybe 1% to 10% of the transaction value)? Are you thinking how much may have made in the recent Twitter IPO?

The above analogy is very simplified, and in technical terms, IB involves the following.

  1. 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. read more
  2. Sales and Trading
  3. Raising Capital through IPO, FPO, Private Placements, Bond Placements
  4. Underwriting and Market Making activities
  5. Mergers and Acquisitions
  6. PitchBook Preparation
  7. Restructuring and reorganization

Investment Banking Overview Videos

To understand Investment Banking functionsInvestment Banking FunctionsInvestment banks perform various functions for their clients, including initial public offerings (IPOs), mergers and acquisitions, risk management, equity research, structuring of derivatives, merchant banking, and investment management.read more and its roles in detail, I have prepared a 14 part, “What is Investment Banking?” video tutorial series to help you jump-start on this topic.

Part 1 – Introduction

 

Part 2 – Investment Banking vs. Commercial Banking

This part 2 video tutorial on Investment Banking vs. Commercial Banking discuss the following important basics-

  • What is an Investment Bank?
  • What is a Commercial Bank
  • Investment Banking vs. Commercial Banking.
 

Part 3 – Equity Research

This part 3 video tutorial Equity Research discusses the following –

 

Part 4 – What is Asset Management Company

This part 4 video tutorial on What is Asset Management Company AMC discuss the following

  • What is the Asset Management Company or AMC?
  • How does Asset Management Company work?
 

Part 5 – Buy Side vs. Sell Side

In this part 5 video tutorial on Buy-Side vs. Sell SideBuy-Side Vs. Sell SideSell-Side refers to those corporations, investment banks and advisory firms who engage in the issuance, selling and trade-in of the financial securities. In contrast, the buy-side involves hedge fund companies, pension fund organizations and investment managers who purchase financial securities.read more, we discuss the following –

 

Part 6 – Sales and Trading

In this Part 6 video tutorial on Sales and Trading, we discuss

  • What is Sales & Trading?
  • Sales Function
  • Trading Function
 

Part 7 – Raising Capital

In this part 7 video tutorial on Raising Capital – how investment bankers help raise capital through Private Placements of shares, IPOs, and FPOs  –

 

Part 8 – Underwriters

In this 8th part on Underwriters, we discuss the following –

  1. What is Underwriting
  2. Role of Investment Bankers in Underwriting IPOs
 

Part 9 – Market Making

In this part 9 on Market Making by Investment Banks, we discuss the following –

  • Market Making
  • Role of Investment Bankers in Market Making Activities
 

Part 10 – Mergers and Acquisitions

In this part 10 video tutorial on Mergers and Acquisitions, we discuss the following –

 

Part 11 – Restructuring and Reorganization

In this part 11 video tutorial on Restructuring and Reorganization, we discuss

 

Part 12 –  Roles, Positions, and Hierarchy

In this Part 12 video on Investment Banking Roles and Responsibilities, we discuss the key roles and responsibilities of this job.

  • Analyst
  • Associate
  • Vice President
  • Managing Director
 

Part 13 – Front Office vs. Back Office vs. Middle Office

In this part 13, we discuss the following –

 

Part 14 – Conclusion

 

Free Tutorials

Additional Resources that you can use to enhance your knowledge –

What Next?

This article has been a guide to what is Investment Banking and its domains like Equity Research, Sales & Trading, M&A, etc. If you learned something new or have any comments/questions/suggestions, please drop me a note in the comment section below.

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