What is Investment Banking?

Investment banks are like matchmakers…

Just as a matchmaker might make a match between a potential bride and groom, an investment bank’s job is to match up people who have money they are looking to invest (known in investment banking as the buy-side) with companies or entities who need to raise capital (known as the sell-side).

There are a variety of services that investment banks offer to their clients. These include underwriting new debt and equity, advising on mergers & acquisitions, and facilitating the sale and trading of securities. Let’s talk a little more about each of these services.

• Underwriting: Investment banks underwrite new debt and equity for companies. Investment banks can underwrite these deals, which includes evaluating and assuming some of the risk. This commonly happens during an IPO.
• Mergers & Acquisitions: Investment banks help to facilitate mergers & acquisitions (M&A) and advise companies through the process. M&A refers to the consolidation of companies, whether through a partnership or a purchase.
• Sales and Trading: Investment banks help to match up buyers and sellers of securities and other financial products.
• Asset Management: Investment banks can help their clients to manage investments such as securities and other assets. This includes analyzing the company’s financials, performing research on stock and investment options, and making recommendations to clients to help them grow their portfolios.

Investment banks serve companies, governments, and other entities who need to raise capital. The size of the company or entity helps to determine what kind of investment bank it should hire. Some specialize in helping large companies, while others work specifically with small deals in a specific region.

As an individual, you would not turn to an investment bank to help manage your assets and investment. Instead, you would work with a financial advisor who helps individuals.

There are three primary types of investment banks:

Boutique banks

Boutique banks are the smallest investment banks in the industry. This category of banks can be further broken down into two more specific categories: regional boutique banks and elite boutique banks.

• Regional boutique banks: As the name suggests, these investment banks offer services only in a particular region. They typically have few employees, close the smallest deals, and only offer a limited menu of services. For example, one regional boutique bank might specialize in mergers and acquisitions for small corporations in the midwest United States.
• Elite boutique banks: This type of investment bank usually looks very different from its regional counterpart. These boutique banks typically specialize in a select number of investment banking services. For example, one might specialize in advisory work for M&A, restructuring, and capital-raising. Despite the term “boutique,” the deals these investment banks work on can be quite large.

Middle-market banks

A step up from the boutique banks is the middle-market banks. They typically offer a full range of investment banking services, but with smaller deals than the largest of the investment banks.

Bulge bracket investment banks

Bulge bracket banks are the large, full-service investment banks whose names you probably recognize. These names include Goldman Sachs, Morgan Stanley, Bank of America, and JPMorgan Chase.

Bulge bracket banks typically have the largest clients and handle the largest deals.

Because bulge bracket banks are so large, they often run a commercial banking operation in addition to their investment banking division.

When you hear the word “bank,” you probably think of the bank where you house your checking and savings accounts and deposit your paychecks. This is nothing like what investment banks do.

Investment banks deal with buying, selling, and tracking securities. Commercial banks, on the other hand, primarily deal with deposits and loans for individuals or companies.

Investment banks and commercial banks both provide services to businesses, but they are very different types of services.

Before 1933, banks often combined both investment and commercial banking divisions. However, the Glass-Steagall Act of that year prevented them from doing that.

The Glass-Steagall Act prohibited securities firms and investment banks from taking deposits and prohibited commercial banks from acting as investment banks. The bill was meant to make banks safer for consumers and to restore confidence in the banking system.

Even though the Glass-Steagall Act was repealed in 1999, most banks still either only engage in one type of banking or they keep their investment banking and commercial banking divisions completely separate.

An investment banker is someone who helps to assist corporations and other entities with mergers & acquisitions, capital creation, the buying and selling of securities, and other asset and investment management. Investment bankers often do this work through a job at an investment bank. Investment bankers act like financial advisors, but for companies.

Investment bankers work with the clients hiring the investment banks in order to help them reach their financial goals.

For example, in a mergers and acquisitions (M&A) transaction, an investment banker in this scenario would represent either the company doing the acquiring or the one being acquired.

Investment bankers can also have a hands-on role in helping companies to raise capital. They do this by facilitating the sale and trade of securities and underwriting these deals.

Because of the financial nature of the job, investment bankers need to be well-versed in math and financial matters.

Additionally, investment bankers need to have excellent communication and people skills. A big part of their job is building relationships in order to gain or maintain clients.

Jobs in investment banking can be very attractive because they tend to come with high salaries. According to the Bureau of Labor Statistics, the median pay for a job in securities, commodity contracts, and other financial investments is $97,110.

While the pay for investment bankers tends to be a lot higher than the average professional, the hours tend to be long as well, often far exceeding the traditional 40 workweeks.

While there’s no single path to follow to become an investment banker, there are certain core competencies that are required.

Mathematics is an essential element of a job in investment banking, so many investment bankers have a degree in math, accounting, or finance.

While education above and beyond a bachelor’s degree is not necessarily required, many choose to pursue a graduate-level degree such as a Master of Business Administration (MBA).

Most of the training to become an investment banker happens at an investment bank or firm. Individuals start in an entry-level job — such as being an analyst — to learn the ropes of the industry and hone the skills necessary to move up.

Once someone has become employed as an investment banker, they have to register as a representative of their firm with the Financial Industry Regulatory Authority (FINRA).

Investment bankers may also have to pass a specific “series” exam based on the job responsibilities they will have.

Over the next 10 years, job prospects for investment banking roughly match the average for all occupations. However, the Bureau of Labor Statistics states that job prospects for financial services might slow, partly as a result of consolidation in the financial services industry.