“Wall Street is the only place where people ride to in a Rolls Royce to get advice from those who take the subway.” – Warren Buffet
As the credit crisis unfolds globally, I’ve heard a lot of people asking the question “What is an investment bank? How does it differ from a regular, commercial bank?” Unless you work in finance, you may not have come across the term investment bank before the global meltdown began.Let’s begin with the basics. What is an Investment bank? Why does it have the glitz and glam factor that your commercial bank does not?
An investment bank is a special type of financial institution that caters to the financial needs of large institutions, rather than retail consumers like you and I. Investment Banks help companies and governments issue securities, help investors purchase securities, manage financial assets, trade securities and provide financial advice. Simply put, an Investment Bank acts as an intermediary between those who need capital (the demand side) and those who have excess capital (the supply side).
For example, If Coca-Cola wanted to sell $10 billion worth of bonds to build new bottling plants in Asia, an investment bank would help them find buyers for the bonds and handle the paperwork, along with a team of lawyers and accountants.
The top investment banks including Goldman Sachs, JP Morgan and Morgan Stanley, are called Bulge Bracket, meaning they offer an entire gamut of services including Research, Securities Trading, Traditional M&A and IPO advisory as well as Asset Management services and even have their own Private Equity Arms. A boutique like Avendus Capital or Lazard, for instance, will only focus on Corporate Finance advisory which includes M&A and raising private equity on behalf of its clients. Slightly larger ones might even run an IPO but that means you need to have large teams that can support you on the sales and trading side.
What does an Investment Bank Actually Do?
A typical investment bank will engage in some or all of the following activities:
- Raise equity capital (e.g., helping launch an IPO or creating a special class of preferred stock that can be placed with sophisticated investors such as insurance companies or banks)
- Raise debt capital (e.g., issuing bonds to help raise money for a factory expansion)
- Insure bonds or launching new products (e.g., such as credit default swaps)
The Buy Side vs. Sell Side of an Investment Bank
Investment banks are often divided into two camps: the buy side and the sell side. Many investment banks offer both buy side and sell side services. The sell side typically refers to selling shares of newly issued IPOs, placing new bond issues, engaging in market making services, or helping clients facilitate transactions. The buy side, in contrast, worked with pension funds, mutual funds, hedge funds, and the investing public to help them maximize their returns when trading or investing in securities such as stocks and bonds.
Careers in Investment Banking can be extremely rewarding, exciting, and lucrative, but also high pressured, demanding and nerve-wracking! Because of the confluence of emotional and mental aspects required for these careers, investment firms often look for specific skills and characteristics in potential employees.
First and foremost, Investment Banks are looking for dynamic candidates who can thrive in an ever changing environment – This means they must be able to multi-task and manage their time effectively.
Strong analytical and interpersonal skills are an added advantage since candidates will have exposure to clients globally.
Interestingly, with all the rigor and structure in Investment Banking, the ability to be creative and innovation is an extremely highly regarded skill.
Ultimately, this is a high risk / high reward profession both in terms of the money you make and overall personal growth. Those that excel need to be mentally prepared to work long hours – not necessarily all the time, but yes, at least at the start of your career where you would need to focus on sharpening your skills sets and domain knowledge.
Many college graduates start or target jobs at an Analyst level and through hard work, perseverance and continuous improvement are able to rise to the levels of top management.
Job Roles on Offer in an Investment Bank
Finally, let’s look at the type of jobs that can be offered to you at an Investment Bank.
Investment Banks are segregated into three major roles:
- Front Office, Middle Office, and Back Office operations where trades are booked, processed and settled respectively.
- But beyond these three major departments, we need to know that clients just can’t start trading.
- We need to conduct extensive research on their backgrounds hence there has to be an AML/KYC department at an IB. Hence, we see a lot of jobs offered in Anti-Money Laundering –where we understand if the source of income from an investor is illicit or not.
- Know your Customer- This step makes the bank understand the type of customers they will be dealing with, Client Onboarding and Reference data Management and setup helps clients to be setup successfully on the banking platforms.
- The Risk Management teams reduce the risk exposure which a client would be exposed to due to the volatility of global markets, Legal and Compliance and the regulatory environment.
All in all, working in an Investment Bank gives an end to end flavor of global markets and economic development.
Think you are up to the challenge and have what it takes? Your first step is to educate yourself. Imarticus Learning offers various courses on Finance and our CIBOP (Investment Banking Operations) course is best suited for those who want a fulfilling career in Investment Banking.