What is Investment Banking?

Investment banking is a special segment of banking operations that helps individuals and organizations raise capital and receive financial consultancy services. Investment banks also act as the intermediary between security issuers and investors and help new companies go public. To do so, they either buy all the available shares at an established price and then resell them to the public, or they sell shares on behalf of the issuer and take a commission on each share.

The investment banking system is one of the most complex financial mechanisms in the world because of its broad range of activities and clients. Some of the services they provide include propriety trading, mergers and acquisitions advisory, equity and debt capital raising, leveraged financing, restructuring aid, bonds insuring, and IPO issuance.

Interested in investment banking? Read these articles to get started:

• 37 Free Resources to Break Into Investment Banking
• Top Ten Investment Banks in the World
• The Comprehensive Guide to Investment Banking–What to Do From Freshman to Senior Year
• Crafting the Perfect Investment Banking Resume: Best Practices
• Key Skills Every Aspiring Investment Banker Must Have

How are investment banks different from retail and commercial banks?

The main difference between investment banks and retail/commercial banks is that the former cater to businesses and the latter cater to individuals. Retail/commercial banks accept deposits of money and lend it out to borrowers. Investment banks, on the other hand, don’t take deposits; instead, one of their main activities is raising money by selling securities–like shares and bonds–to investors. The proceeds from these sales help companies, government entities, and entrepreneurs finance big projects that require upfront capital, like research and development or expansion into a new market.

The clients of investment banks also tend to be larger and more sophisticated organizations with more complex funding needs than those of commercial banks. In simpler terms, investment banks are the middle party between those with money and those with ideas who need funding. By channeling money into productive projects, they provide these individuals with the capital they require.

Some of the largest investment banks in the world include Bank of America, Barclays Capital, Citigroup Investment Banking, Deutsche Bank, and JP Morgan.

Example

An example scenario of an investment bank is if company A is thinking of buying company B. A is not sure how much B is worth or what the long-term financial situation looks like. In this case, an investment bank will be brought in to conduct due diligence in order to determine the value of company B, help negotiate terms of the deal, prepare documents, and advise on the timing. This investment bank is on the side of company A but there may be other firms helping company B on the other side. The bigger the size of the deal, the more commission the bank will earn.

Investment Bankers

Investment banks employ investment bankers who help corporations, governments, and other organizations plan and manage large projects. Through this work, their clients save time and money by having risks associated with the project identified beforehand. The investment bankers are experts with substantial knowledge of the current investing climate. Because of this, businesses ask them for advice on how best to plan their development, and the bankers will tailor their recommendations to the present state of economic affairs.

When hiring bankers, investment banks look for employees who can thrive in a dynamic environment and are adept at multitasking and time management. These individuals should be very analytical and comfortable working with numbers and have advanced communication and interpersonal skills. Investment bankers are tasked with helping clients solve some of the most critical financial and strategic challenges, and as such, it is a competitive and lucrative industry.

Final Note

Leland provides you with the content, community, and coaching that you need to get into your dream investment banking job and accomplish other ambitious goals. Here are some other articles you may find interesting:

• Wealth Management vs. Investment Banking: Key Differences and Career Prospects
• Top Ten Investment Banks
• The Best MBA Programs for Investment Banking
• The Comprehensive Guide to Investment Banking - What to Do from Freshman to Senior Year
• 37 Free Resources to Break into Investment Banking
• How to Prepare for a Career in Investment Banking

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