Investment banking is a complex and often misunderstood field, but it plays an essential role in the world of finance. Investment bankers are responsible for a wide range of financial activities, including mergers and acquisitions, capital markets, leveraged finance, and restructuring. In this article, we’ll break down exactly what investment bankers do, the kinds of clients they work with, and their day-to-day activities.
What is Investment Banking?
Investment banking is an institution that advises and helps clients execute financial transactions. Investment banks have three main types of clients: companies, governments, and individuals. However, some large investment banks, like Goldman Sachs and Morgan Stanley, do far more than just advising and executing financial transactions on behalf of their clients. They also have divisions where they buy and sell securities, stocks, shares, bonds, and derivatives. There are also divisions dedicated to research and wealth management.
The Main Divisions of an Investment Bank
There are six main divisions at a typical investment bank. Let’s take a look at each of them, what they do, and who works there.
Investment Banking Division (IBD)
The investment banking division, also known as IBD, is typically separated into two main areas: mergers and acquisitions (M&A) and capital markets. In the M&A area, investment bankers advise and execute transactions on behalf of clients who want to buy or sell businesses. In the capital markets area, investment bankers help clients raise capital by issuing shares or bonds to investors.
Mergers and Acquisitions
In M&A, investment bankers help clients execute financial transactions. This can include helping a client buy out a competitor, acquiring a different part of the supply chain to reduce costs, or acquiring a company in a different country to access a new market. Investment bankers work in a similar way to real estate agents, valuing companies and finding potential buyers or investors.
Capital Markets
In capital markets, investment bankers help clients raise capital through the issuance of shares or bonds. Companies may want to raise capital for a variety of reasons, such as expanding operations, investing in research and development, expanding overseas, or paying down debt.
An IPO is a common way for a company to raise capital. An IPO, or initial public offering, is when a company issues shares and sells them to the public. This allows the company to raise capital in exchange for giving up partial ownership. Investment bankers can also help companies raise capital by issuing debt, such as selling bonds to institutional investors.
Leveraged Finance and Restructuring
Leveraged finance and restructuring are other sub-departments within the investment banking industry. Leveraged finance is a way for companies to raise capital through debt, but it differs from traditional debt financing in that it uses a higher level of debt relative to equity. Restructuring involves helping companies reorganize their operations, often by divesting underperforming assets or merging with other companies.
Sales and Trading Division (S&T)
The sales and trading division buys and sells securities on behalf of clients, including hedge funds, pension funds, endowment funds, companies, and individual traders. The sales team calls clients and tries to sell them on trading ideas, while the trading team develops trades and communicates them to the sales team to get them sold. Investment banks act as market makers, meaning they are forced to make markets for all shares and assets traded on the exchange.
Equity Research Division
The equity research division is responsible for researching and analyzing companies and stocks to provide investment recommendations to clients. They produce reports that analyze a company’s financials, industry trends, and overall prospects.
Asset Management Division
The asset management division manages clients’ assets, including stocks, bonds, and other investments. They work with clients to develop investment strategies that meet their specific needs and risk tolerance.
Operations Division
The operations division handles the day-to-day administrative tasks of the investment bank, including accounting, trade settlement, and risk management.
Technology Division
The technology division is responsible for developing and maintaining the investment bank’s technology systems. They work on developing trading algorithms, risk management systems, and other technology solutions.
Conclusion
Investment banking is a complex and multifaceted industry, but it plays an essential role in the world of finance. Investment bankers are responsible for a wide range of financial activities, including mergers and acquisitions, capital markets, leveraged finance, and restructuring. While investment banking is an old industry, it has evolved over time to keep up with the changing financial landscape. By understanding what investment bankers do and the kinds of clients they work with, you can gain a better appreciation for the intricacies of the financial world.
Additional Resources
To keep learning and advancing your career, we highly recommend these additional resources:
15 Reasons Why Investment Banking is the Dream Job for Financial Graduates
120+ Investment Banking & Finance Interview Questions!
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