Investment Banking Basics – Concepts for Every Investment Banking Aspirer
Investment banking has taken the financial division by storm. With Corporate Houses and Governments by their side, Investment Banks are growing daily, every minute. Despite bull and bear challenges and being hit by COVID-19, it has taken a U-turn and is providing promising growth now and in the future. But are you aware of its origin and its basic concepts? In this article let us ponder on Investment Banking Basics.
The journey of investment banking started in the 19th century. The Dutch East India Company was the first one to issue its shares to the public. Since then they exercised control over the market.
In 1970, the State Bank of India took the initiative to create a Bureau of Merchant Banking. 1973 ICICI Securities became the first Indian establishment to proffer merchant banking services. Consequently, during 1980, merchant banks increased in India. The growth of merchant banks and financial institutions was remarkable.
By 1990, nearly 1500 merchant banks had registered themselves with the Securities and Exchange Board of India. With such a huge number of banks registered, to regulate banking activities, check their compliance and promote the banking business Association of Investment Bankers was established.
With all these bodies, the banking business started to flourish in India.
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Investment Banking as the name suggests is related to investment. Who is interested in investing, how they will invest, how much to invest, on whom the money is to be invested and what service to opt for is what the investment banks deal with.
It deals with two parties. One is the investor who has money to invest so that they can earn their return. The other party is those corporate houses or entrepreneurs who need money to sustain themselves in the market. So, investment banks assist in raising money from investors and provide this money help to governments, entrepreneurs and high-profile individuals who need cash to develop their businesses. So, they act as a middleman for both the parties.
In this type of banking, the services provided are Mergers and Acquisitions, Underwriting, Equity Capital, Equity Capital, Debt Finance, Sales and Trading, Initial Public Offering and Research.
Investment Banking Companies in India
Below mentioned are some of the investment banks.
- ICICI Bank
- Axis Bank
- Axis Capital Ltd.
- Morgan Stanley
- Barclays Bank
- Goldman Sachs
- Avendus Capital Pvt ltd
- BNP Paribas
- HDFC Bank
- Aditya Birla Sun Life
- Citi Group
- JP Morgan Pvt Ltd
- Kotak Mahindra Capital Co. Ltd
- SBI Capital
- Yes Bank
- Bank of America
Classification of Investment Banks
When we learn about investment banking basics, it is important that we understand the classification of investment banks. The size of the bank, the number of clients handled, and the services provided help in the categorization of the bank. Types of banks are one of the most important aspects of investment banking basics.
It is bifurcated into three types. They are as follows.
These types of banks are small in size. Since it is small in size it handles fewer clients. It is further grouped into two categories. They are:
Regional Boutique Bank:
These are small banks situated in specific regions of the country. They offer very few services. The amount of customers is also pretty less. Some boutique banks may provide only single services like Mergers and Acquisitions. The project size may be less than or equal to $100 million.
Elite Boutique Bank:
They are upgraded versions of Boutique banks. They serve more than one service but not the entire range of services. They are bigger compared to regional boutiques. Their client handling capacity is also much more. They have their presence in multiple locations in a country. They do not possess any international appearance. Their project size is approximately $1 billion. Some of the elite boutique banks are Ripple Wave, Veda Corp, Signal Hill, and Mape.
Middle Market Banks:
They are mid-sized banks. They proffer services to mid-sized clients. Their average project size is around $500 million to $1 billion. They are bigger than Boutique banks but smaller in size and operations when compared to bulk bracket banks. They are situated in many locations throughout the country. Their international presence is not big like the bulge bracket banks. Service-wise, they offer almost all the services that investment banking provides for their clients. Some of the examples of this type of banking are O3 Capital and Spark Capital, Piper Sandler and Cowen Group.
Bulge Bracket Banks:
They are the biggest investment banks. Their size is larger than the other boutique banks and middle-market banks. They handle many clients and all the big daddies of the business world. They are handling Fortune 500 companies. The presence of these banks is in multiple cities and multiple countries. They have a strong international presence. Their project size is usually above $1 billion. Another interesting feature regarding Bulge Bracket Bank is that they have three divisions – trading, advisory and retail. All three divisions generate profit. Examples of this type of bank are Credit Suisse Group, Deutsche Bank, Morgan Stanley and Goldman Sachs to name a few.
Service Bouquets of Investment Banking
Under this headline, we are going to elaborately describe the services offered by the investment banks. These are the pillars of investment banking as these services help them earn their bread and butter. Every investment banker or someone aspiring to be an investment banker should know the investment banking concepts of services.
Below mentioned are service bouquets provided by the investment banks.
It is a process where the investment bank raises capital from the investors by selling stocks on behalf of government or business entities. Investment banks act as a middleman between both groups. They are assisting the investors to invest their money in good projects and on the other hand, they are assisting the entities to get money to continue and grow their business.
But is it that simple? No, the underwriter goes through intensive research work and assesses how much risk is involved. They study the detailed market conditions and set appropriate loan rates. As risk is the key element of underwriting, the underwriter also checks that the borrower pays the loan amount at an appropriate time. It is the most important investment banking basic concept.
Mergers and Acquisitions (M&A):
This is the second most common investment banking basic concept. M&A is an interesting concept in investment banking. This service aims for business growth. In this service, two types of actions occur. First, two entities can merge and form a new organization. They make business decisions mutually by designing logos, changing staff, giving a new name to the company and other business and operational issues. The second one is when one entity acquires the other entity. It can either fully acquire the other business or can acquire it partially.
Investment banker plays a crucial role. He is the one to decide and advise correctly to both parties about the financial transactions. He should also take care of the proper formalities and documentation between both parties. The banker should also ensure that both parties have a mutual understanding of the contract.
Initial Public Offerings (IPO):
IPO is the process when a private organization turns into a public organization. This means that a private corporation offers its shares to the public. Here the public buys the shares of the company and raises capital for the company. This is also an important service provided by investment banks and a very important investment banking concept to understand.
The investment banker assists the company in deciding the price of the shares and how much of its share is to be provided to the market. When the company decides to go for initial public offerings that means the private ownership changes to the public owner. Indeed, the company enjoys the benefit of getting more capital and making the business grow bigger. But before offering shares to the public the company must be mature and they should abide by certain rules and regulations.
Research is also one of the investment banking basics to be dealt with, by bankers. What do the bankers research about? Bankers research various things. As they work for financial institutions their basic research work will be about financial statements, market conditions, the economy of the country and the status of their clients. Besides this, the bankers also need to update themselves with various companies in various sectors, the performance of the company and their financial conditions. They also need to be aware of various regulations and laws related to the financial sector. They help the investors decide whether to invest in a particular project or not.
Many investment banking firms offer financial advice to their client. For this service, the banks have to do thorough research work. The researchers should know how to analyze data, communicate well and have a creative and problem-solving approach.
In this aspect, investment banks offer financial guidance to their clients, like corporations, governments and high-profile individuals. The topic can be anything related to the financial transactions and investment types. They advise the investors on where they should invest and how much to invest. They also advise the investees on which investor they should bid on and also the amount of the transactions.
Nowadays, many firms are offering this service so that they build better relationships with their clients and also a bond. The better way the banker deals with their clients solves their problems, assists in making decisions and guides them, the better reputation the firm gains in the market.
Sales and Trading:
This is also one of the crucial concepts in investment banking. This is the heart and soul of investment banks and one of the important concepts of investment banking that every person interested in investment banking, finance persons, investment bankers and economists should know.
This sector deals with two processes, one is sales and the other is trading. In the sales division, the salesperson assists their clients in selling and buying shares and other financial instruments. They look to it that their client can make profits out of their buying or selling activity. So, the representatives of the banks dealing with sales always should be aware of the market prices and shares. The next is the trading division. In this division, the trading activity is conducted by the investment bankers on behalf of their corporate clients. The traders should ensure their clients that the trading execution price is minimal. Here, the bankers should be aware of the price of securities. They should be up-to-date with the current pricing list.
Equity Capital is the process of raising funds for the companies. The financial institutes help the company to raise funds through stocks, shares, securities and other financial instruments. They assist in raising capital for corporate houses either publicly or privately. This method helps in the growth of business or business expansion.
Both equity and debt financing are major parts of investment banking basic. Debt financing is in contrast to equity financing. Here the capital is raised through loans. In this type of financing activity, an entity gets monetary benefits from another company for a period which is to be paid back in the future. The company provides loans to another company. This is the usual form of debt financing. This can be for a short-term period or a long-term period. The debtor company also pays an interest amount to the creditor company.
Investment banks see to it that their clients do not incur any loss and they also advise them about the company’s market positions and other financial transaction details.
The above discussed are the main services of investment banks that every investment banker and people related to investment banking should know. These concepts are very important investment banking basics because they are the only services that investment banks can deal with. The ultimate goal of investment banks is to raise capital from the market or investors and for the investees.
Investment banking basics means the history or evolution of investment banking, what exactly investment banking means and what investment banking deals with. This also includes the type of investment banking and what are the investment banking firms existing in and outside India. All these topics provide us with a basic understanding of investment banking and its overview.
Now that we have understood in detail all the concepts of investment banking, don’t you think that we should also concentrate on investment bankers how these investment banks are organized, and what is the future of investment banking in India? I think without these topics the investment banking basics are inadequate. So come let’s check out briefly about the related topics and make the investment banking basics a complete one.
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Organization of Investment Banks
Like any other office structure, investment banks follow a particular method to set up their offices. Knowing how the investment banks work will be a bit interesting, by knowing how it is organized. This is the reason why I have mentioned it among investment banking basics.
The organizational structure of these financial institutes is categorized in three different ways. They are as follows.
The front office of investment banks carries out all the selling activities. Here the bankers are pitching on trades, involved in buying and selling activities, M&A and also providing financial guidance to the clients.
In this segment, they try to innovate some special features with financial instruments to pitch their clients.
This segment deals with back office work, like analytics of data and other technical aspects. This section deals with the operational aspects of the investment bank. Here they deal with the statistics that will help them to grow well in the financial market.
Role of an Investment Banker
An investment banker is a person who arranges the services for their clients. They are financial advisors for Corporate Houses, Governments, and high-profile customers. Being an investment banker is the most desired opportunity for any candidate with a finance background.
When we are talking about investment banking basics, having a profound knowledge of the role of an investment banker gives an edge to choosing it as a career option. This is one of the highest-paid jobs. They can typically earn a six-figure amount utilizing their skills, wisdom, knowledge, and intelligence.
The basic job of an investment banker is to issue debts and sell securities. They need to provide strong customer assistance. Besides this, they help the clients to carry out various financial activities like, mergers and acquisitions, capital raising, mutual funds, providing knowledge to the customer on which service to be opted for, Initial public offerings, issuing bonds and restructuring corporate.
They must be well versed in maths, data analytics, various regulations and compliances and should possess an intense knowledge of market conditions. As per Glassdoor, the average salary for investment bankers in India is around INR 20,31,620 per year.
As per Indeed.com some of the designations or job titles of Investment Bankers are Teller, Client Associate, Banker, Branch Manager, Financial Associate, Financial Analyst, Portfolio Analyst, Financial Advisor, Equity Analyst, Investment Banking Analyst and Private Equity Associate. But with extensive experience and intense knowledge in investment banking, you can achieve the title of Managing Director.
Not only jobs, but you can also start your own business and establish yourself as a brand. You can provide financial advice to high-end customers. You can also take a step up and start your online teaching classes for investment banking. As this subject is like a hot cake it helps you to gain fame. This will help you to earn bucks from home with less stress.
As I have come to the end of this article, I would like to highlight the aspect that, investment banking is growing. It is sure to grow a lot in the future. It provides a lot of scope for jobs and also assists in proper cash flow in the market. As the Indian economy is growing and the market of India is rising high, the future of investment banking is also sky-high. Not only this India is the world’s fifth largest economy so that will grab the attention of many foreign investors. This in return will help us to grow and flourish. The insights shared in this article regarding investment banking basics, hope to help you in future. Hope you loved reading it!!
FAQs related to Investment Banking Basics
1. What is the difference between Investment Banking and Commercial Banking?
Investment banks help corporate houses or government or high-end clients by raising capital from the investors by selling financial instruments like bonds, shares, securities etc. Whereas commercial banks deal with individuals. They take deposits from the general public and provide them with interest. They use this deposit money to get interest from the loans that they are offering to the public. So, this is how they gain profit.
2. Is an investment banking career a good option to choose?
Of course, investment banking is a very good career option. The young generation with knowledge in finance and analytics are choosing this as their career. Individuals can earn up to six figures by choosing investment banking as their career.
3. Are there institutes from where we can learn Investment banking?
Yes, there are several options from where we can learn about investment banking. But among all the online education, IIM Skills provides good coaching for investment banking. They are providing the world’s no.1 professional courses. They conduct online courses. They offer placements and they have tied up with great giants of the industry like JP Morgan and Goldman Sachs. You can visit their website or call for more details. www.iimskills.com is their website you can check in details about their program structure, fees and other details.
4. What are the top investment banks in India?
Some of the top investment banks in India are JPMorgan, Bofa Securities India Ltd., Goldman Sachs, Morgan Stanley, ICICI Securities, Axis Capital, Kotak Mahindra, and SBI Capital.