In this article, we discussed the meaning of investment banking, we also talked about the types and career in investment banking.
Definition
Investment banking is a special segment of banking operation that helps individuals or organizations raise capital and provide financial consultancy services to them. They act as mediators between security issuers and investors and help new firms to go public. They either buy all the available shares at a price estimated by their experts and resell them to public or sell shares on behalf of the issuer and take commission on each share.
Investment banking is among the most complex financial devices in the world. They serve many different purposes and business entities. They provide various types of financial services, such as exclusive trading or trading securities for their own accounts, mergers and acquisitions advisory which involves helping organizations in M&As, leveraged finance that involves lending money to firms to purchase assets and settle acquisitions, restructuring that involves improving structures of companies to make a business more efficient and help it make maximum profit, and new issues or IPOs, where these banks help new firms go public.
Types of Investment Banks
Investment banking is a wide and diverse spectacle. One may categories investment banks into different types based on particular limits.
Investment Banking Services
Investment banking products or services are a individual factor . An investment bank may choose to shape a niche in a specific service. Alternatively, an investment bank may cater to each financial requirement of the client.
These services include the following.
- Underwriting
It refers to raising capital from the direct market and is a primary service provided by investment banks. Underwriting includes initial public offerings and debt financing.
Transaction Advisory
It includes facilitating blends, purchase, leveraged takeovers and alliance and is at the heart of investment banking. These transactions include two or more financial entities, each employing to derive maximum value for its stakeholders.
The primary role of an investment bank is to evaluate the viability of the transaction and assist in the negotiation between the parties. it charges a fee or a fixed percentage of the deal value in exchange.
Sales & Trading
Investment banks also provide sales and stock placement services. It handles investment and broking for corporates and high-net-worth clients.
Research
Almost all investment banks have a research department focused on high-value creation for clients. Research is an auxiliary function of investment banks to support their profit centers. Most of it have an in-house research division for detailed coverage of financial products and industries. Thus, an investment bank may focus on specific financial products or activities.
Size of Investment Banks
One may classify into various types based on their size. Size is a relative term, and various factors determine the size of it For example, the services offered, number of clients or employees, average deal size, number of offices or locations serviced, etc.
Regional Boutique Banks
Regional boutique banks are the smallest by size and average deal size. Clients for regional boutique banks include smaller firms and organizations based in their areas or the local and state government. Regional boutique banks have dozens of employees with specialized skill sets.
Below are some distinctive features of a regional boutique bank
- Services Offered – Regional boutique banks offer a restricted number of services due to their small size. Instead, it focuses on a specialized area, such as handling mergers and acquisitions for a specific industry.
Elite Boutique Banks
Elite boutique banks differ from regional boutique banks and resemble bulge bracket banks.
- Service Offered – The similarity between a regional and an elite boutique bank is the scope of services offered. Elite boutique banks do not provide a complete range of its services. It concentrates on mergers and acquisitions and related issues. At times, it may provide restructuring or asset management services.
Middle-Market Banks
As the name suggests, middle-market banks are between regional boutique and bulge bracket banks.
- Services Offered – Middle-market provide a full range of investment banking services like a bulge bracket bank. Its services include raising equity and debt capital, financing and asset management services, and restructuring deals. It may specialize in a particular industry or sector, like a regional boutique bank.
Bulge Bracket Banks
Bulge bracket banks are the biggest, easily recognizable with a global presence. Bulge bracket banks lead in terms of employee strength, number of offices and the biggest corporate clients. Most clients of a bulge bracket bank are in the Fortune 500 list of companies.
Bulge bracket banks tend to have three divisions – trading, advisory and retail and each division is a center for revenue and profit generation. The advisory division earns from transaction services and capital generation for clients. The trading division profits from market outperformance, whereas the retail division gains from loan disbursal to businesses and consumers.
Working in Investment Banking
If you wish to build a career in investment banking, you must consider the following points –
- Skills Required
You must have in-depth knowledge of financial modelling and valuation methods. Additionally, you must be comfortable preparing presentations and pitchbooks, financial documents like term sheets, agreements, investment teasers, etc. Negotiation is a crucial skill required to ensure a smooth deal conclusion.
Careers in Investment Banking
These are the most well-known roles ,but many other careers exist in investment banking. These jobs help ensure the bank can exactly, safely, and efficiently raise capital for companies and governments.
Investment bankers
They raise capital and advise financial decisions — they work with clients to underwrite securities, source and organize M&As, and create financial models to inform their client’s decisions.
Brokers
Brokers act as intermediaries between buyers and sellers. For example, , they aid in finding investors to buy securities.
Actuaries
Actuaries analyze the risk involved in financial decisions and make predictions about how various situations could affect a company’s finances.
Accountants
Accountants track and report a company’s financial performance and business transactions.
Investment managers
Investment managers advise clients on how to invest and manage their portfolios to maximize returns.
Inconclusion: investment banks serve as middlemen between a company and investors when the company wants to issue stock or bonds. The assists with pricing financial instruments to maximize revenue and with navigating regulatory requirements.