What Is Investment Banking & How Does Investment Banking Work?

Investment banking is a section of a bank that helps big companies and governments in getting money and making important business moves.

What does an investment banker do? Investment bankers act as connectors between investors and companies that need funds to grow. They play a key role in important financial transactions.

This guide helps you understand investment banking and the vital role played by investment bankers in raising capital and facilitating mergers and acquisitions.

What is investment banking?

What is an investment bank? An investment bank is like a financial middleman that helps with big money deals. When a new company wants to sell its shares to the public for the first time (IPO), or when two companies want to join together (merge), the investment bank steps in.

On the other side, private equity is a type of investment that gathers money from rich individuals and companies.

It also works with different clients include pension funds, corporations, governments, hedge funds, and other financial institutions.

What are investment banks? Some big investment banks you might have heard of are JPMorgan Chase, Goldman Sachs, and Morgan Stanley. They don’t just deal with big companies; some also have regular banks and services for rich individuals.

Types of investment banking

Investment banking comes in different types, and two main ones are:

Corporate finance

Industry coverage

What is an investment banker?

What is a investment banker? An investment banker is an individual within an investment bank who acts as a financial advisor to large companies and organizations.

What does a investment banker do? This expert provides advice on and facilitates financial transactions for corporations and governments, including fundraising, IPOs, underwriting, and mergers.

Investment bankers assess the feasibility and risks associated with various projects, helping clients make informed investment decisions. They play a crucial role in saving time and money for their clients by providing valuable insights into potential risks and benefits.

History of investment banking

A long time ago, the Dutch East India Company became the first to share ownership with the public by selling bonds and stocks. They were also the first to be traded on a stock exchange.

Over time, investment banking changed from helping companies go public and facilitating mergers to offering a full range of services like research, trading, and managing investments.

In the U.S., there used to be a law called the Glass–Steagall Act that kept regular banking and investment banking separate. In 1999, they got rid of this law, and now big banks can do more things.

After the 2008 financial crisis, they made new rules to limit some risky practices in investment banking.

Traditionally, banking investment banks make a lot of money by helping companies sell stocks, but nowadays, they make money in different ways like advising on mergers, managing investment funds, and doing their trading. The old way of making money from selling stocks has become less important.

How does investment banking work?

Investment banking is like a middleman between big companies and people who want to invest money. Here’s how it works:

When a big company wants to raise money by selling shares (like parts of the company), it hires an investment bank.
The investment bank helps the company go public by organizing an Initial Public Offering (IPO). This means the company's shares are available for anyone to buy on the stock market.
The investment bank buys a bunch of these shares directly from the company and then sells them to people in the stock market. They act as a middleman between the company and investors.

The investment bank sells the shares at a slightly higher price to investors, making a profit. This helps the company make more money too.
But there's a risk – if the market is not doing well, and the shares lose value, the investment bank may lose money. They have to be careful about this.
Besides selling shares, investment banks also advise companies. If a company wants to make smart investments or needs financial guidance, it can turn to an investment bank.
Companies need to think about how much money they want to raise and the competition in the market before choosing an investment bank.

What does investment banking do?

Investment banks do a lot of different things.

Imagine there's a big bank that does everything, like helping companies raise money, giving advice on buying and selling businesses, trading stocks, researching stocks, managing money for people and companies, and even regular banking for everyday people.
This whole package is what we call a full-service investment bank.
Now, inside this big bank, there's a special team called the investment banking division (IBD).
They mainly focus on two things: helping companies raise money. This is where capital markets come in by finding investors and providing advice when companies want to merge or acquire other businesses.
So, in simple terms, investment banks help with money stuff for all kinds of businesses, and the investment banking division does the specific jobs of raising money and giving advice on mergers and acquisitions.

Why investment banking?

It is an attractive career option for several reasons:

How to get into investment banking?

To get into investment banking include these steps:

Get a degree in finance or economics, and consider pursuing an MBA or an advanced degree in math.
A Chartered Financial Analyst (CFA) certification can also enhance your prospects.
Connect with professionals, attend events, and join relevant organizations.
Gain experience through internships at top firms.
Develop persuasion, negotiation, and relationship-building skills.
Prepare for and pass relevant licensing tests from the Financial Industry Regulatory Authority (FINRA), such as Series 9, Series 63, and Series 79.
Present yourself professionally, as appearances matter.
Stay updated on industry trends and market developments.
Understand and specialize in specific areas like underwriting, financing, or mergers.
Be persistent and tenacious; the field is competitive and demanding.
Focus on continuous growth, build a strong reputation, and consider leadership roles.

How do investment banks make money?

How do investment banks earn money? Investment banks make money through various services, including brokerage and underwriting, mergers and acquisitions advisory, collateralized product creation, proprietary trading, dark pools, swaps, market making, equity research, and asset management.

How much does investment banking make?

The earnings of investment banks vary widely, and their revenue is derived from fees, commissions, and trading profits.

High-profile investment banks such as Bank of America, JPMorgan Chase, and Goldman Sachs can generate billions of dollars in revenue annually. Individual compensation for investment bankers can include base salaries, bonuses, and other incentives.

Is investment banking worth it?

Yes, investment banking can be worthwhile for several reasons. It offers lucrative financial rewards, opportunities for skill development in areas like financial analysis and deal structuring, global exposure to diverse financial markets.

And valuable networking opportunities, a challenging and fast-paced environment that fosters adaptability, association with prestigious financial institutions, and the chance to contribute to impactful financial transactions such as mergers and acquisitions.

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Conclusion

Investment banking is a vital financial intermediary, connecting large companies and governments with investors. Investment bankers facilitate major transactions, provide financial advice, and play a key role in fundraising and mergers.

The industry has evolved, offering specialized services and remains attractive for its financial rewards and challenging opportunities. Success in investment banking requires education, networking, and continuous skill development.

Frequently Asked Questions

1. How much does investment banker make?

Investment bankers can earn six-figure salaries as beginners and successful mid-career bankers may make tens of millions annually. Earnings depend on experience, deal success, and industry performance.

2. What are the three primary functions of an investment banker?

An investment banker has three main roles: underwriting, distributing, and providing advice.

3. Do banks invest your money?

Yes, banks invest a portion of deposited funds in assets such as real estate, bonds, and stocks.

4. Are banks good to invest in right now?

Banks provide a safe place for savings, but other investment options should be considered based on individual financial goals and risk tolerance.

5. Is there a future for investment banking?

Even though some bankers caused financial problems before, they are important because they help governments get money from investors. This money is used to build things like roads and helps the economy. So, having these institutions is important for a stable economic future.

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