Investment banking is a specialized area of the financial services industry that focuses on aiding governments, corporations and other entities to raise capital and complete mergers and acquisitions. The term “investment banker” refers to an individual who works for an investment bank that offers these services.
Investment banking is typically considered to be a prestigious career, and becoming an investment banker can be lucrative for those willing to complete the necessary education and training.
What Is an Investment Banker?
Investment bankers work for investment banks, which are effectively middlemen between entities that need capital and entities that provide it. In simpler terms, investment bankers help their clients to expand and grow their businesses or operations.
Another way to think of an investment banker is as a financial advisor to governments, corporations, and other businesses. As part of their professional duties, they may guide clients in making financial decisions that directly or indirectly affect their bottom line.
Investment bankers are most often associated with Wall Street, though they work in cities throughout the world. Some of the largest investment banks in the United States include Goldman Sachs & Co., Morgan Stanley, J.P. Morgan, Bank of America Merrill Lynch, and Blackstone.
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What Do Investment Bankers Do?
Investment bankers play an important role in helping companies achieve their financial goals. When a corporation is planning an upcoming expansion project, for instance, its board may turn to an investment bank for help. An investment banker can analyze the company’s financial situation to determine the best way to meet its needs.
In terms of the specific tasks an investment banker may carry out, that depends largely on the type of clients they work with.
Assisting With Initial Public Offerings
Investment bankers can play a critical role in helping clients secure capital. Depending on the client, this can be done through a variety of means, including the launch of an initial public offering (IPO).
An initial public offering, or IPO, allows private companies to offer shares of its stock to the public for the first time. The investment banker assists by creating a prospectus explaining the details of the IPO, marketing it to potential investors, and navigating Securities and Exchange Commission (SEC) compliance rules.
Investment bankers are key to whether the company’s IPO is a success. They help determine the initial price of the offering, which is critical. Pricing too high could scare off investors, while going too low could undercut their client’s profits.
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Government agencies and corporations often use bonds as a fundraising tool. For example, if a city government needs money to improve local roads they might issue a municipal bond to fund the project. Investors purchase the bonds on the bond market, giving the government the capital it needs to complete the road updates. Investors can hold onto the bond and earn interest on it, or they can sell it to another investor.
As with an IPO, an investment banker’s role in issuing bonds may include preparing the bond issuance documents, setting a price, submitting it to the SEC for approval, and marketing the bond to investors to raise capital.
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Equity and Debt Financing
Equity and debt financing are two other ways that companies can tap into funding. With equity financing, companies raise capital by selling an ownership share in the business. Venture capital and private equity are common examples of equity financing.
Debt financing involves taking out loans or lines of credit, without giving up ownership stakes. An investment banker can help companies assess which type of financing makes more sense for their business model, and help them work through the process of securing the funding.
For example, investment bankers may work with startups to pitch angel investors, while they might help more established companies compare and select loan options.
Mergers and Acquisitions
Another common task that investment bankers assist companies with is mergers and acquisitions. In a merger, two companies enter into an agreement to become a single business entity. Each company is treated as an equal in the transaction. An acquisition, on the other hand, involves one company purchasing another.
In either type of arrangement, companies may use investment bankers to oversee the process. This could involve negotiating the terms of a merger or acquisition and reporting the details of the transaction to the SEC to ensure compliance. When a company considers an acquisition, investment bankers can also help identify and vet potential targets.
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Investing and Asset Management
While investment bankers’ duties primarily revolve around raising capital for their clients, there are other services they may perform. This can include things like:
• Investment research and analysis
• Buying and selling securities
• Offering advisory services
• Asset management
These services are similar to what a personal financial advisor might offer their clients.
💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.
How to Become an Investment Banker
If you’re interested in a career in investment banking, there are a few things to know. In terms of education, a bachelor’s degree is typically a minimum requirement for most investment banker jobs. Though some investment banks may look for candidates that have earned a higher degree of education, such as an MBA or a graduate-level degree in finance.
Aside from education, there are certain skills that may help you be successful as an investment banker. Those include:
• Ability to perform under pressure
• Good communication skills
• Solid marketing skills
• Firm grasp of financial markets and modeling
• Strong attention to detail
Depending on your responsibilities, you may also need a securities license. That may include completing one of more of the following licensing exams:
• Series 7 General Securities Representative Qualification Examination (GS)
• Series 79 Investment Banking Representatives Exam
• Series 63 Uniform Securities Agent State Law Exam
Before you can take these exams, you first have to be employed and sponsored by a FINRA-member firm or other self-regulatory organization member.
Taking and passing the Securities Industries Essentials (SIE) Exam could help improve your chances of being hired as an intern or junior employee. That process begins early, with many banks hiring summer interns more than a year ahead of the start of the program.
How Much Do Investment Bankers Make?
Investment bankers generally earn above-average salaries. Even at the entry level, it’s possible to make $100,000 or more, and salaries for top Wall Street bankers can easily range into the millions or tens of millions. But investment banking is one of the hardest jobs on Wall Street. So, if you’re not prepared to routinely work 100-hour weeks or constantly be on-call for your clients, it may not be the job for you.
Investment bankers work primarily with institutional investors, governments and corporations rather than individual investors. But you can still benefit from the work investment bankers do behind the scenes indirectly.
Investment bankers may work in a variety of roles, such as helping facilitate IPOs, or mergers and acquisitions. It can be a lucrative career path, too, but generally requires a graduate-level education, and additional licensing.
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