The global investment banking industry has skyrocketed over the past few decades. And it is only estimated to grow higher each year. From a whopping $102.84 billion in 2020 to $11.45 in 2021, this lucrative business has tremendous growth potential.
But you may be wondering – what is investment banking exactly? What do investment bankers do, and how does the process work?
We’ve got you covered. In this guide, we walk you through everything you need to know about investment banking.
What Is Investment Banking?
Investment banking is a division of a financial institution that serves corporations, governments, and other institutions. Investment banks are essentially the bridge between investors and corporations.
They help facilitate communication and achieve established financial objectives.
Investment banks carry out the following services:
Underwriting
Underwriting is the raising of capital or funds to support a particular organization. It is typically provided when a company wants to go public or launch its IPO.
Investment banks help companies do this by selling stocks and bonds to investors. This, in turn, benefits businesses because they have the capital needed for day-to-day business operation and growth.
Mergers and Acquisitions
Investment bankers offer advice and consulting for the M&A process as well. They typically aid in the process from start to finish.
What does M&A involve, you may ask. It is a process whereby corporations find and complete buying over another business.
The investment bank here will negotiate the best deal for the client. They will also use their contacts and networks to find growth opportunities.
Thus, investment banking represents both the buyer and the seller in an M&A deal.
Sales and Trading
In this sector, investment bankers act as dealers for the client. They help procure and seal trades to further the organization’s net capital.
This process can involve matching up various buyers and sellers.
What Do Investment Bankers Do
Investment bankers are financial advisors to corporations, businesses, and governments. Their success is tied to the success of the capital market. Thus, if the economy is doing well, more money will go towards investment bankers and their clients.
They also have a central role in launching IPOs or initial public offerings. They help with closing mergers and acquisitions, managing final company transfers and sales, and issues stocks and bonds.
Skills Required for Investment Banking
Investment banking jobs are high-stress and come with a lot of prerequisites. Following are some essential skills needed to succeed in the trade.
Financing
Every investment banker has to deal with arranging financing. The companies that banks represent will need funding for projects.
Whether it is building a new office or constructing a highway, the chances are that the corporation has used the services of investment bankers.
The bond will get priced appropriately, documented, and then published to become available for buyers.
Negotiation
M&A is a high-pressure situation that is liable to sudden change. Investment bankers need to be able to keep their cool and manage negotiations with ease through it all.
Negotiations can be lengthy with an ongoing series of offers and counteroffers. Thus, bankers are good at practicing fairness and mediation to ensure both parties get a good deal. There is also a fair deal of relationship management involved in the negotiations.
Financial Modeling
On an everyday basis, professionals in this field carry out financial modeling activities. This includes 3 statement models, discounted cash flow models, and more.
The process involves skills in analysis and research. Bankers need to anticipate future trends and outcomes into present workings as well. The best investment banks carry out a vast range of data analysis practices to provide better value to clients.
Investment Banking Process
The main aim of the process is to raise money. Below is a step-by-step explanation of how the process works, from start to finish.
Selecting the investment banker: Companies will find the right professional for their needs. They evaluate the individuals based on risk, size of funds, strategy, and more.
Brainstorming: The banker shares their insight on the amount to be raised, securities, and more. They also decide on the strategy and offering price.
Underwriting: The underwriting agreement is carried out.
Selling group: All the members of the underwriting syndicate and other parties form a group. They will manage the distribution of assets and determine how they can reach future investors.
Pricing: This is a sensitive issue. A low price can increase interested parties, but it dilutes earnings. A higher price may be a deterrent for investors, but it keeps the profits more solid.
Distribution: The security is distributed to individual investors. This can be done through the form of stocks, bonds, or more.
Stabilizing: Now that the company has distributed its security, it is time to stabilize it. It should arrive at a consistent price by maintaining a firm position in the market. It should also consistently bring in capital for the issuing organization.
Investment Banking Is an Exciting and Fast-Growing Industry
Investment banking plays a vital role in our economy. Whether it is the Wall Street appeal or just interest in the high profile and compensation for the profession, this career is famous for its high growth potential.
We hope this article provided insight into the exciting investment banking field.
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