Breaking down Investment Banking
Investment banking is regarded as one of the most glorious, rewarding and challenging fields in the finance sector. Investment banking is a specialized division in the banking industry that helps individuals and corporations raise funds for their ventures.
Investment bank helps mediate the deal between the borrowing party seeking funds and the investors who are looking for profitable avenues to park their money.
Investment banking encompasses a large range of financial services that also includes providing financial consultancy to clients and advising on profitable investment tools. In addition to this, they also provide services like proprietary trading and trading of securities, facilitating mergers and acquisition deals, debt restructuring, etc.
The major role of investment banks is highlighted during the Initial Public Offers (IPOs) by companies going public.
How do investment banks make money? The major role played by investment bank includes mediating deals between corporations. The main revenue source for investment banks here is their commission on the deals facilitated between two corporations.
Taking an example here for a better understanding, suppose company x is interested in buying company y, company x hires an investment banking firm to conduct a thorough analysis of company y to find out if it’ll be profitable to buy company y based on current stats and future projections.
The investment bank here will conduct a due diligence process on company y to derive a conclusion regarding the value of the company being acquired. If the company x agrees on buying company y, the investment bank will negotiate a deal on company x’s behalf and it’ll earn a commission on that deal. The investment bank will also earn for its due diligence services in addition to the commission.
Role of an Investment Banker
The role of an investment banker is very dynamic and challenging; the job has multiple aspects to it and includes a whole lot that what is perceived by a layman. At the core of this role is raising money for your clients and guiding them on profitable investment avenues. The role requires you to be a mediator so you need to understand the requirements of both the parties involved.
You have to create a win-win situation for both the parties; the one who wants to raise funds and the one who is looking for profitable investment opportunities.
Let’s understand the role of an investment banker in two major contexts; the IPO deals, Mergers & Acquisitions deals. In an IPO deal, the company going public is looking for investment banks to help them offer their share at the best price.
The investment banks help to assess the situation of the company and according to help with pricing the shares to avoid the case of under-subscription and over-subscription by the public. In some cases, the investment banks buy the entire lot of shares being issued by the company and then release it to the public at a profitable price.
In the case of Mergers & Acquisitions deal, the investment bankers role is to help the companies find a good target to acquire or merge by conducting thorough industry analysis and competitor analysis. The mergers and acquisition deals help to bring more synergies to the companies in the same field and increases profitability by reducing competition. This whole process requires valuing the companies being acquired and doing due diligence on the companies being merged.
Getting into Investment Banking
Investment banking is considered as one of the most prestigious fields in finance and therefore it invites a lot of young ambitious aspirants. It is also among one of the most rewarding career opportunities and thus invites a lot of competition.
Having a Bachelor’s degree in finance, economics or statistics can help you gain an entry position easily, having a Master’s degree in Finance provides you with the edge over the competition. You can opt for investment banking courses that specifically target the investment banking industry and provides a comprehensive theoretical and practical understanding of the industry.