Investment banking is a complex financial service that requires specialized knowledge, expertise and resources to provide services such as fundraising, mergers and acquisitions (M&A), underwriting, and sales and trading. Investment banks participate in the fundraising process, helping companies issue securities and assist with various financial transactions. An understanding of this process and what it entails is necessary for anyone looking to understand the essentials about investment banking.
What is investment banking?
Investment banking is a financial industry that uses its expertise to raise funds, invest and engage in other forms of financial transactions. Investment banks assist clients in the private and public sectors with corporate finance, as well as capital markets, restructuring, sale and purchase of securities and authorities’ securities. They also advise on transactions such as public offerings and mergers and acquisitions.
What investment banks do
Investment banks provide a wide range of services, which include the following:
- Raising capital for companies
- Researching and analysing markets
- Mergers and acquisitions advising
- Underwriting new debt and equity securities
- Facilitating the sale and purchase of financial instruments
- Trading stocks, commodities and derivatives
- Providing advice on restructuring, spin-offs and other corporate transactions
Types of investment banking
Investment banking can be divided into two distinct sub-categories: traditional investment banking and boutique investment banking. Traditional investment banking is typically characterised by larger investment banks with a broad range of services and departments. Boutique investment banks, on the other hand, tend to be more specialised and have a limited range of services.
Investment banking roles & duties
Investment banking professionals are typically divided into four main categories: bankers, analysts, associates and managers. Each of these professionals requires a different set of skills, expertise and responsibilities.
Investment bankers (sometimes referred to as managers or vice presidents) are responsible for the financial operations of an investment bank. They oversee the bank’s portfolio of investments, make strategic decisions, develop new business and build relationships with potential clients. They are also responsible for the formation of investment banks’ policies and procedures.
Analysts are responsible for researching and analysing potential investments, including companies, markets, products and services. They develop recommendations, set prices and provide advice to senior bankers. They often use financial models and analysis tools to conduct their research.
Associates are typically responsible for processing transactions, such as issuing new securities or facilitating mergers and acquisitions. Associates also assist bankers and analysts with research and analysis.
Managers are responsible for day-to-day operations and typically have experience in a particular area such as sales and trading, mergers and acquisitions, or capital markets. They often oversee the activities of analysts and associates and are responsible for ensuring that the team complies with regulatory requirements.
Investment banking process
The investment banking process typically involves a range of activities, including research and analysis, pricing, underwriting, sales and trading and compliance. This process is key to helping companies raise funds, invest and facilitate other financial transactions.
Underwriting is the process of assessing a company’s assets and liabilities, and determining an appropriate offering price and structure for a new security. This is usually conducted through the issuance of an investment bank opinion letter.
Mergers & acquisitions
Investment banks are often involved in mergers and acquisitions, providing guidance on valuation, legal and financial due diligence, and negotiations. Investment banks provide advice and negotiations during the process to ensure that the transaction is successful and the best deal is attained.
Sales trading involves the sale of securities such as stocks, derivatives and commodities. Investment banks advise clients on the best investments and make recommendations for their portfolios. They also trade securities on behalf of their clients.
Capital markets involve the issuance of new securities. Investment banks can advise companies on how to issue new securities and manage their ongoing investments. They can also help with the process of taking companies public, listing them on a stock exchange, and raising funds.
Risk & compliance
Investment banks help companies manage risks by advising them on how to control, monitor and manage their investments. They are also responsible for ensuring that the firms comply with regulatory requirements.
Investment banks assist their clients develop strategies to maximise their returns by using research and analysis, pricing, underwriting and other strategies. They often provide advice on market trends and conditions to ensure that their clients are making the best investment decisions.