What is investment banking? When you’re an investor, you’ll go to and rely on others to mitigate your payout with businesses looking for extra capital and vice versa. Investment banks are financial service companies that handle transactions on behalf of individuals, businesses, or governments; they are the middle man that makes sure the investment process runs smoothly. No matter what transitions you make in life, it’s ideal to approach financial advisors for said transitions—investment bankers do just this.
Though it seems simple, there’s more to investment banking than meets the eye. There are two sides of investment banking to be aware of: the buy side and the sell side. Neither side of investment banking can exist without the other. If there’s no one to buy from you, you won’t be able to sell anything; if there’s no one to sell anything, then there won’t be anything you can buy.
- Sell Side: In investment banking, the sell side deals with trading securities (tradable financial assets like debt and equity). Securities can be traded for cash or other securities, depending on the investor’s wants and needs.
- Buy Side: Meanwhile, the buy side of investment banking provides informed financial advice to entities like private equity funds, mutual funds, and life insurance companies.
Investment banks are generally split into three sections: the front office, middle office, and back office. Each section has its own daily activities that it’s responsible for to make sure the investment bank runs smoothly. The front office, for example, is the revenue generator of the company. Employees working in the front office are responsible for giving advice on mergers and acquisitions, sales, research, and so on. They are the customer-facing aspect of investment banks.
Meanwhile, the middle office is responsible for risk management and information technology, while the back office handles human resources, office management, and customer service.
Investment banks offer many services to customers, though they are often confused with regular banks’ investment banking divisions. The key difference is the services provided by investment banks; they usually have much more on their plates than investment bank divisions at a normal bank. Some of these services include:
Investment banks give businesses and governments guidance and advice when they need more capital for a big project. Bankers will plan out the finances for these projects, figure out when to issue corporate bonds, price them to demand, and sell them. Investment bankers can also help businesses figure out the starting price for initial public offerings (IPOs).
Investment bankers also help people through a process called underwriting—financial risks for a fee. Banks will buy stocks and bonds for different businesses they work for, then sell those stocks and bonds to other investors on the market. They’re compensated for this work by marking up the price of the stock they bought, letting them make a profit on the stock or bond rather than break even.
The investment banking industry is split into three different tiers: bulge bracket, middle market, and boutique market. The bulge bracket is what makes up the world’s largest investment banks, all of which serve large corporations, institutions, and governments as their clients. The middle market is similar to the bulge bracket, the only difference being the type of client they work for—the middle market serves smaller companies. Both of these tiers provide advice and financial services to their clients, do research, and help invent new financial products.
The boutique market, meanwhile, offers different services than the bulge bracket and middle market. This tier of bank specializes in one aspect of investment banking—a service or an industry, for example—and offers that specific aspect to businesses that need it.
As with every industry, people who get involved in the investment banking industry need to have certain skills to be successful. A few important skills to learn for both present and future investment bankers include:
- Financial modeling: Creating a representation of the client’s financial situation.
- Business valuation: The process of estimating a company’s value.
- Sales and business development: Knowing how to generate revenue for a company and create long-term value for the company.
- Relationship management: Being able to build and maintain solid relationships with investors.
- Negotiation: Speaking on behalf of clients to get the best possible deal for all parties.
Investment banking is a wide and varied industry with many responsibilities. Having the basic knowledge of how this industry works will help you if you plan to work in this industry and assist you in your future as an investor.