What is the definition of investment banking?
Investment banking is a division of a bank or financial institution that provides underwriting (capital raising) and mergers and acquisitions (M&A) advising services to governments, corporations, and organisations. Investors (who have money to invest) and corporations are connected through investment banks (who require capital to grow and run their businesses). This tutorial will define investment banking and explain what investment bankers perform.
What are the Functions of Investment Banks?
The difference between an investment bank and a bank’s investment banking division (IBD) might be confusing at times. Underwriting, M&A, sales and trading, equities research, asset management, commercial banking, and retail banking are all services offered by full-service investment banks. A bank’s investment banking business exclusively offers underwriting and M&A advising services.
The following services are provided by full-service banks:
Capital raising and underwriting firms bring together investors and companies wishing to raise money or go public through the IPO process.The primary market, or “new capital,” is served by this function.
Mergers and Acquisitions (M&A) – Advisory positions for both buyers and sellers of firms, overseeing the M&A process from beginning to end.
In the secondary market, sales and trading connect buyers and sellers of securities. Investment banking sales and trading departments function as agents for clients and can also trade the firm’s own funds.
Equity Research – An equity research group’s research, or “coverage,” of securities aids investors in making investment decisions and promotes stock trading.
Asset management is the process of managing investments for a variety of clients, including institutions and individuals, in a variety of investing strategies.
Investment Banking Underwriting Services
Underwriting is the process of raising funds on behalf of corporations or other entities by selling stocks or bonds to investors (e.g., in an initial public offering IPO). Businesses require capital to operate and grow, and bankers help them obtain it by marketing the company to investors.
Underwriting can be divided into three categories:
Firm Commitment – The underwriter agrees to purchase the entire issue and assumes full financial responsibility for any shares that remain unsold.
Best Attempts – The underwriter agrees to sell as much of the issue as feasible at the agreed-upon offering price, but the issuer has the right to return any unsold shares without incurring financial liability.
The deal is called off and the issuing business receives nothing if the entire issue cannot be sold at the offered price.
Following the bank’s marketing of the offering, the book-building stages to price and close the deal are taken.
Advisory Services for M&A
M&A advisory is the process of assisting corporations and institutions in locating, evaluating, and closing company acquisitions. In i-banking, this is a critical function. Banks use their broad networks and relationships to identify opportunities and assist clients in negotiating. Bankers provide advice on both sides of M&A deals, representing either the “buy-side” or “sell-side” of the transaction.
The 10-step mergers and acquisitions procedure is outlined below.
Investment bankers provide capital raising and mergers and acquisitions advice to a wide variety of clients. Clients hail from various corners of the globe.
Clients of investment banks include:
Governments – Investment banks help governments raise money, trade securities, and buy and sell crown enterprises.
Bankers assist both private and public corporations in going public (IPO), raising extra capital, growing their operations, making acquisitions, selling company segments, and providing research and general corporate finance guidance.
Banks assist institutional investors in trading securities and conducting research on behalf of their clients. They also assist private equity firms in acquiring and exiting portfolio companies.positions by selling to a strategic partner.
Skills in Investment Banking
Financial modelling and valuation are essential components of I-banking activities. Analysts and Associates at banks spend a lot of time in Excel, constructing financial models and utilising various valuation methods to advise their customers and close agreements, whether for underwriting or M&A activity.
Building 3-statement models, discounted cash flow (DCF) models, LBO models, and other sorts of financial models are all examples of financial modelling.
In investment banking, the following skills are required:
Business valuation – Using a variety of approaches such as similar company analysis, precedent transactions, and DCF analysis to value a company.
Pitchbooks and presentations — Create pitchbooks and PowerPoint presentations from the ground up to pitch ideas to potential clients and gain new business (see CFI’s Pitchbook Course).
Preparing transaction- documentation such as a confidential information memorandum (CIM), investment teaser, term sheet, confidentiality agreement, data room setup, and more (see CFI’s library of free transaction templates).
Relationship management –is working with existing clients to seal a sale and ensure that they are satisfied with the service delivered.
Sales and business development — Meeting with potential clients on a regular basis to propose ideas, offer help in their work, and provide value-added advice in order to acquire new business.
Negotiating – Assisting clients in maximising value creation through negotiation methods between buyers and sellers in a transaction.
Investment Banking Careers
Getting into i-banking is quite difficult. There are much more candidates than vacancies available, sometimes up to 100 to 1. For more information on how to break into Wall Street, check out our guide on how to ace an investment banking interview.
You should also take a look at our sample of real interview questions from an investment bank. Taking financial modelling and valuation classes can also help you prepare for your interview.
In i-banking, the most prevalent job titles (from most junior to most senior) are:
- Director of Operations
- Head, Vice-Chair, or an other title
What are the Most Important Investment Banks?
In investment banking, the main banks, sometimes known as the bulge bracket banks, are:
Bank of America is a United States-based financial institution.
Merrill Lynch, Inc.
- Capital Barclays
- Credit Suisse Group
- Bank of Germany
- Goldman Sachs, Inc.
- Morgan, J.P.
- Morgan Stanley is a company that provides financial services.
Here is a complete list of the top 100 investment banks. It’s vital to remember that a substantial portion of the industry is made up of smaller organisations known as mid-market banks and boutique investment banks.