What is investment banking? Is it investing? Is it banking? Really, it is neither. Investment banking is the term used to describe the business of raising capital for companies and governments and advising them on financing and merger alternatives. Capital essentially means money. Companies need cash in order to grow and expand their businesses; investment banks sell securities (debt and equity) to investors in order to raise this cash. These securities can come in the form of stocks, bonds, or loans. Once issued, these securities trade in the global financial markets.
Investment banks act as intermediaries between an issuer of securities and the investing public, distributing an offering through their dealer networks or direct sales to clients. Services offered, in addition to underwriting, typically include asset securitization, structuring corporate mergers and acquisitions, and arranging private placements of debt or equity securities. When working with clients, an investment banker offers his or her expert advice and counseling on pricing securities to be offered for sale, filing the registration documents with government agencies, managing the sales distribution syndicate, and communicating periodically with the investor community.
Investment banks, in addition to the services mentioned above, have an array of investment products and services which they offer clients through private banking or wealth management divisions, or through their broker-dealer networks. Clients have a wide variety of investments to choose from, including mutual funds, separately managed accounts, private equity, and hedge funds.
Investment banks, too, see their fortunes rise and fall with the rhythm of the economy. An investment bank’s lifeline is its ability to gauge the market cycle months, if not years, in advance to keep its deal pipeline flowing. The largest banks have a competitive advantage because large transactions require the financial muscle that only a handful of deep-pocketed investment banks can offer.
In the largest investment banks, typically called the bulge bracket banks because they are active players in every part of a new securities offering, there are several distinct divisions:
- Sales and Trading
- Corporate Finance (including the mergers and acquisitions area)
- Research (including credit research, quantitative analysis, macroeconomic research, etc.)
- Asset Management for retail (individual) investors and institutional clients (pension funds, governments, etc.).
- Divisions that support the investment bank on all levels, such as Risk Management and Technology divisions.
So-called boutique investment banks, smaller firms that specialize in one or more fields, will concentrate in two or more of these functional areas. Some of these positions offer plenty of mobility, most often from analyst positions into capital markets or asset management.