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 –
- What is it exactly?
- I have heard about commercial banks. Are they different from the Investment banks?
- What is Sell Side and Buy Side in an Investment Bank?
- How much salary can one expect?
- Is it true that Bankers earn money in tonnes and their bonus is 3-4 times that of their very handsome salary?
- How do they help in IPOs?
- Who are the Market Makers?Who Are The Market Makers?Market makers are the financial institution and investment banks which ensures enough amount of liquidity in the market by maintaining enough trading volume in the market so that trading can be done without any problem.
But before we move on, let us first answer the most important question –
How does Investment Bank work?
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 –
- 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.
- 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. 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.
- 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.
- Sales and Trading
- Raising Capital through IPO, FPO, Private Placements, Bond Placements
- Underwriting and Market Making activities
- Mergers and Acquisitions
- PitchBook Preparation
- 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. 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 –
- What is Equity Research?
- How Equity Research Makes Money
- What is a typical Equity Research jobEquity Research JobEquity research analysts jobs are competent for the candidates who have a keen interest and understanding in financial analysis of the companies. The profile includes suggesting equities as well as buying and selling the stocks on the clients' behalf. profile?
- Who are the clients of the Equity Research Department
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., we discuss the following –
- What is Sell Side?
- What is Buy Side?
- Key differences between Sell Side and Buy SideBuy SideThe term "buy-side" refers to entities that advise their clients like individual investors and institutional buyers on investments and securities purchases. Private equity firms, mutual fund companies, life insurance companies, unit trusts, hedge fund companies, and pension fund entities are examples of buy-side firms.
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 –
- How companies raise capital?
- Role of Investment Bankers in Raising Capital
- What is Initial public offerInitial Public OfferInitial Public Offering (IPO) is when the shares of the private companies are listed for the first time in the stock exchange for public trading and investment. This allows a private company to raise the capital for different purposes. (IPO) and Follow-on Public Offering or FPO
- What are Private Placements
Part 8 – Underwriters
In this 8th part on Underwriters, we discuss the following –
- What is Underwriting
- 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 –
- What are Mergers and Acquisition or M&A
- How Investment Bankers help in M&As
- Due diligence for M&A
- Investment Banking PitchBookInvestment Banking PitchBookPitch Book is an information layout or presentation used by investment banks, business brokers, corporate firms, and others to provide potential investors with the firm's main attributes and valuation analysis, which helps them decide whether or not to invest in the client's business. A pitch book is also known as Confidential Information Memorandum, which is used by the firm's sales department to help them sell products and services to a client.
Part 11 – Restructuring and Reorganization
In this part 11 video tutorial on Restructuring and Reorganization, we discuss
- What is Restructuring
- What is Reorganization
- Investment Banker’s role in Restructuring and Reorganization.
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.
- Vice President
- Managing Director
Part 13 – Front Office vs. Back Office vs. Middle Office
In this part 13, we discuss the following –
- What is a front office
- What is a back office
- What is a Middle office
- Front office vs. Middle OfficeFront Office Vs. Middle OfficeFront office is defined as different business processes within the organization where the primary responsibility of interacting with the customers. In contrast, back-office means all the production and background processing of the tasks required to deliver a quality product or service lies with the back office. vs. Back Office
Part 14 – Conclusion
Additional Resources that you can use to enhance your knowledge –
- Free Investment Banking Courses – This free course is a must for someone new to IB. This free course starts from Excel, then moves to teach Accounting concepts, Valuations concepts, and finally, Financial Modeling conceptsFinancial Modeling ConceptsFinancial modeling refers to the use of excel-based models to reflect a company's projected financial performance. Such models represent the financial situation by taking into account risks and future assumptions, which are critical for making significant decisions in the future, such as raising capital or valuing a business, and interpreting their impact.. Try and make the most from this Free course.
- Sell Side vs. Buy SideSell Side Vs. Buy 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. – This article provides you with the frequently asked difference between the sell side vs. Buy side in IB.
- Investment Banking Questions & Answers – This article details the frequently asked interview questions on IB. As a fresher, you may find these resources useful.
- Investment Banking Associate Salary – So, what is the salary of an IB Associate. If you move into IB and get promoted to an associate from an analyst position, what is the typical salary that you can expect?
- Guide to Investment Banking Pitch Books – This guide to IB pitch book provides you with nuts and bolts of preparing a pitch book. Pitchbook is nothing but professional presentations prepared by Investment bankers when they communicate with clients.
- Equity Research Guide – This comprehensive guide on equity research provides a bird’s eye view of What equity research is all about, what to expect, skills required to become an equity research analystBecome An Equity Research AnalystAn equity research analyst is a qualified professional who interprets financial information and trends of an organization or industry to provide recommendations, opinions, reports, and projections on the corporate stocks to facilitate equity trading., and how to prepare an equity research report.
- Financial Modeling Training – This financial modeling training is a very detailed case study. In this, we take a live case study of Colgate, download its annual reportsAnnual ReportsAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements., and prepare a fully integrated financial model linking the Income Statement, Balance Sheet, and Cash Flows. This tutorial is a step by step guide to learning Financial Modeling, where you will find an unsolved excel case study and solve Colgate Case Study.
- Investment Banker Lifestyle – In this article, we discuss a typical day as a Banker. What are the work timings, job responsibilities, pressure situations, etc.
- Investment Banking Course – If you want to learn IB professionally, you can also opt for this course. In this course, 99 video courses are covering a range of concepts from AccountingConcepts From AccountingAccounting concepts are the principles, assumptions, and conditions that govern accounting's foundation. They ensure that the accounting is done in a way that the financial statements present a true and fair view., valuations, financial modeling, pitch book, LBOs, Private Equity, etc.
- Also, check out the Top Boutique Investment Banks, Top Bulge Bracket Investment BanksTop Bulge Bracket Investment BanksTop 10 bulge bracket investment banks are - Blackstone, Goldman Sach & co, Morgan Stanley, J.P Morgan Chase & co, Bank of America Merrill Lynch, Credit Suisse, Citi, Deutsche Bank, HSBC, UBS., Top Middle Market Investment BanksTop Middle Market Investment BanksThe deals of a mid-tier investment bank range from USD 50 million to USD 500 million. They offer the same services as the bigwigs, i.e. bulge bracket banks, but are not as geographically present internationally as they are..
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.