Investment banking is a specific division of banking that relates to creating capital for companies. Many investment banks do not take deposits as commercial banks do. The three main areas of investment banking are sales and trading, asset management and investment banking.
The largest investment banks offer all three services, but there are smaller firms that focus on just the investment banking area. Most investment banks spread investments and securities management in several regions of the globe to ensure a wide coverage of multiple financial markets.
An investment bank will underwrite equity securities and debt for many different types of businesses. Experienced investment bankers, such as Warren Stephens, will provide guidance and advice to issuers about the placement and issue of stock.
The services provided include private wealth management, insurance, capital management, institutional sales and trading, private equity, public finance and research.
Investment Banking Services
Companies want to create a relationship with an investment bank when they need a financial partner that can help them understand financing a business and managing its assets. Investment bankers give strategic planning advice to inform the company’s executives about the best time to make a public offering or to manage its assets.
For example, if a privately held company wants to sell pubic stocks, it will sell all of the stock to an investment bank. The bank will then offer the stock for sale to the general public. Sometimes, the stocks will be divided between several investment banks to make the venture less risky.
Most of the large investment banks offer all of the above services. However, they become known for expertise in one particular area.
Some of the deals involved in investment banking products are:
- Leveraged Finance – the issuance of high-yield debt to firms to finance acquisitions and other activities
- Mergers and Acquisitions – advice on the merger, sale and purchase of companies
- Debt Capital Markets – raising and structuring debt to finance acquisitions and other activities
- Equity Capital Markets – advice on equity-derived products and equity
- Restructuring – to improve the company’s structures and make it more profitable or efficient
- Commercial banking – since 1999 when the Glass-Steagall Act was repealed, some investment banks offer commercial banking
Working for an Investment Banker
The hierarchy in an investment bank is basically the same in all companies, but the names may differ. An analyst is the lowest person and the place new recruits begin. The best way to be offered the job is to be an intern at the bank of choice during your junior year of college and get a full-time job offer to start at the end of your senior year.
The workload is huge at 80 – 100 hours per week, but the pay is worth it. The compensation is very high compared to other career opportunities. Some analysts specialize in particular economic regions.
An associate will have an MBA and have been working at the investment bank for several years. Sometimes, at the end of three years as an analyst, you can be promoted to associate.
Associates coordinate the work of analysts according to the expectations of the vice president. Associates work the same amount as analysts or a little less, but they are paid more.
Vice presidents or directors are managers. They oversee the analysts’ and associates’ work to make sure it is in line with what the senior vice president and managing directors want. The work is more client-oriented and relationships with clients are more important.
Senior vice president or executive director is also a managing director. They execute deals and focus on client relationships. The managing director is the highest position in the investment bank without becoming a CEO or CFO. The managing director maintains client relationships and finds new clients.
Investment banks manage investments and take risks according to the advice of its analysts, associates and vice presidents. When a bank takes calculated risks and acts sensibly, it can thrive in the global market.