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Investment Banking Explained For You – A Detailed Guidance

A famous journalist Hartley Withers uttered that a bank becomes good, not by good laws but by good bankers. Bankers are the ones who build relationships with their customers. They make the customers trust their bank. In investment banks, investment bankers are an asset. They are the ones who provide life to the brick-and-mortar structure. Is your mind getting reflected to join the industry? This article on ‘Investment Banking Explained’  describes the full details of what an aspirer should know. Dig into the article.

Investment Banking Explained (1)

Investment banking is witnessing a burgeoning growth. Though many people feel that the job in the investment banking sector is unstable, it is not. Yes, the investment banking sector depends on market conditions, but an investment banker’s job is stable and reputed. This sector is one of the most desired and preferred sectors among business persons, governments, and various other big and small industries. Without investment banking money cannot be properly channelled. Choosing proper financial services is indeed a reason for a company’s development and growth. This article will give you a glimpse of the entire investment banking, its functions, scope and future and how to become an investment banker. Ready for it?

Halcyon Days

In this article, that the history of investment banking holds a major role. Without knowing the halcyon days, we would never be able to relate to investment banking.

The rise of investment banking started in between 19th and 20th century. Before that traders or merchants used to trade with products such as grains, jewelry, milk, and others as such.

The Dutch East India Company first issued shares, bonds, and stocks to the public. These foreign banks governed the investment banking sector. The evolution of Investment banking was different for different countries.

Indian investment banking sector sprouted in 1970 when the State Bank of India founded the Bureau of Merchant Banking. ICICI Bank became the foremost bank to sell investment banking services.

The 1980 to 1990 period observed an outpour of banks. This started the real challenge of how to safeguard the legal practices that are to be followed by financial institutions. Hence Securities and Exchange Board of India (SEBI) has initiated the Association of Investment Bankers of India (AIBI). It was created to check if the member institutions are abiding by proper banking rules and regulations.

 

 

A Fact:

Previously, investment banking and retail banking were considered the same in the United States. Due to the Wall Street Crash in 1929, the Glass-Steagall Act of 1933 separated the two-banking system. From then on investment banks and retail banks started operating separately.

This measure was taken up to secure the utility aspect of everyday banking. Retail banking should not suffer a loss due to higher risk-related investment banking activities.

That is how investment banking has started culminating in India. At present, it is taking a mammoth growth. As the economy of India is developing, investment banking is reaching its peak. Due to the evolution of many start-ups, small businesses, and big corporations trading in India, this sector is receiving a red-carpet treatment.

Structure Of Investment Banks

Investment banks are those banks that typically help in capital raising from investors. They raise funds for government projects, business entities, start-ups and people who need money to invest in their projects. This is what investment banking means in very simple terms.

So, we can say investment banks deal with two parties – the creditors and the debtors or the investors and the investees.

The investment banks are typically segregated into three definite sections. Those are the Front Office, Middle Office, and Back Office.

Front Office:

  • This part of the investment bank is responsible for making a profit. It is the profit zone.
  • In this part basically, two types of operations are conducted.
  • The first is to deal with mergers and acquisitions and financial strategies that are used for fundraising.
  • The second aspect involves sales and trading as well as research.

Middle Office:

  • This segment of the office deals with the internal functions of investment banks.
  • Their main operations include checking the treasury of the bank, internal risk-controlling measures and strategies that the bank should work on for better customer handling and significant growth of the bank.

Back Office:

  • The last segment of the office structure is in investment banks.
  • This team is in charge of monitoring the technical requirements of the bank.
  • It is also involved in data checking aspects, checking the financial amounts and processing its smooth operation.

This is the structural overview of investment banking. A typical investment bank follows this structure for its effective and smooth functioning.

This article provides a complete guide for the aspirers and has highlighted the history of investment banking, the definition of investment banking, and its structure is also explained.

 

Also Check,

Do you know there are three types of investment banking? Which one would you prefer to join?

Genres of Investment Banking

Investment banking is of three types.

Boutique Bank

Boutique banks are regional and country-level banks. They handle a lesser number of customers and also restrict themselves to provide lesser services. Boutique banks are of two types.

Regional Boutique Banks:

As the name suggests regional boutique banks are located at regional levels. They entertain a small number of customers. They offer only one service. Like, either merger and acquisition or underwriting or others as such.

Elite Boutique Banks:

These types of banks are spread in more than one territory. They are a little bigger than the regional banks. They offer more than one service. The number of customers handled is bigger than the regional boutique banks.

Some of the boutique banks of India are,

  • Avendus Capital
  • O3 Capital
  • Spark Capital
  • Equirus Capital
  • Ambit Corporate Finance
  • SBI Capital Markets
  • Mape Advisory Group

Middle- Market Banks

These banks are bigger. They grab a nationwide presence. They provide many of the functions that an ideal investment bank should provide. Their customers are also larger as compared to boutique banks. As they have a larger customer base the profit earned by them is also more. Some of the middle market banks are

  • ICICI Securities
  • HDFC Bank
  • Kotak Investment Banking
  • Axis Capital
  • Motilal Oswal Investment Advisors
  • Centrum Capital

Bulge Bracket Banks

As the name says, bulge bracket banks are the biggest and largest of all. They serve large customers and usually, their customers are Fortune 500 companies. Bulge bracket banks dominate the national as well as international markets. They take care of all the services that an investment bank should provide to its audience. Starting from fund-raising, research and advisory activities all are dealt with in this category of banks. Some of the examples of bulge bracket banks are written below,

  • JP Morgan
  • Goldman Sachs
  • Morgan Stanley
  • Bank Of America
  • Barclays
  • Credit Suisse
  • BNP Paribas
  • UBS

As we know the history of investment banking, the structure of investment banking, and investment banking types, are we ready to take an overview of the functions of investment banking? Or it can be referred to as what work happens in those skyscrapers? This article highlights the major service bouquets of investment banking.

 

 

 

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Functions of Investment Banking

The basic function of investment banking is to raise money from the market. This money is provided to a borrower corporation as a loan. Mergers and Acquisitions are also an important aspect of investment banking. Some of the vital functions of investment banks are explained here.

Mergers and Acquisitions (M&A):

M&A is between two companies, where one company either merges with the other or the one company acquires the other company. In M&A the investment banks play the role from both the buyer side and the seller side. The investment bank assesses the value involved in the deal, the risk involved and other such details and informs both the organizations. It coordinates mergers and acquisitions to make the deal successful so that both the seller and the buyer are profitable.

Underwriting

Underwriting is the next aspect in the role of investment banking. Underwriting is related to fundraising. This is the most fundamental work in investment banking. Here the investment banks underwrite the securities of the issuing entity and then sell the securities in the market and also earn high premiums. The risk involved is more as the underwriter has to correctly assess the risk involved with the venture.

Initial Public Offering (IPO):

IPOs are very common activities of investment banks. When a corporation decides to go public, they raise capital through shares. This whole process is identified as an IPO. Investment banks help organizations by guiding them through the entire procedure. They help them to decide how much shares to consider, market situations, the financial position of the company and how much risk is involved in the project.

Equity Capital:

In equity capital market investment banks help corporations to raise money through shares, stocks and other such financial instruments. This involves a lot of risk.

Debt Capital:

In debt capital, the investment banks raise money for the borrower company through bonds and debt securities. It involves a little less risk compared to equity capital.

Research:

Research work in investment banking is to find out about the market situations, current economic situations, details of the organizations and also to maintain the efficient money flow in the whole transaction. They also analyse the risk that is involved in the deals. They do entire research about the ventures that assist the investment bank as well as the organizations involved in it.

These are some of the major functions that the investment banks deal with. These are their day-to-day work activities. The basic work of investment banks is to raise money from the market with the use of various financial tools.

So far, the article has shown us a detailed overview of the early eras of investment banking, its definition, types and the functions that it is involved with. Now shall we check, what roles the investment bankers play? What work do they have to do, what are their designations and how much salary they can expect? Let us throw some light on these topics.

 

What do Investment Bankers Perform?

Investment bankers are the drivers of investment banks. The article refers the investment bankers as busy bees.

They are responsible for client handling, client relationships, client profit and every aspect related to serving the clients better. This yields a heavy profit to the investment banks as the clients give them business.

The investment bankers are also responsible for measuring the risk involved in the ventures. They go through the deals and check all the details related to it. So, they are key persons who will suggest to the clients which financial activity will help them to earn profit.

Research work is also a part of the job. The analysts especially are involved in research activity. They will do research regarding market conditions, client details and other such activities.

Another work of investment bankers is to see how the financial transactions between the organizations are carried out smoothly and efficiently. Both sides should abide by the rules and the regulations.

As investment bankers climb up the hierarchy, they focus mainly on bringing new clients to the banks and ensuring the growth of banks. They bring more business for the banks, which would turn profitable for the banks. They concentrate on the marketing aspect of the bank for better business growth.

The article has thus highlighted some of the crucial jobs of investment bankers. These are the basic roles. Any aspirant should gain knowledge about all these subjects before they step on to their dream jobs.

 

Job Roles of the Investment Bankers

The job of investment bankers is no doubt challenging. The investment bankers have their rhythm for work. They have arranged timings to get inside the office, but no fixed timing for coming out. But, one aspect that should be said in bold letter is the salary offered. The investment bankers are working for long hours, but their salary is speaking it all. Let us embark on some of the major job roles of investment banks. The roles described in this article are not only India-specific, it is an overall job roles of investment bankers throughout the world.

Analyst

They are the freshers in the field. Analyst positions are for those who join the industry after completing graduation or IB courses without any job experience.

They perform research activities and work on Excel and PowerPoint to prepare reports. What report to be prepared and what to work on totally depends on their senior. The associates assign them jobs and the analysts perform accordingly. They usually perform data-driven jobs. They gather various data and assemble and analyse it to construct reports. These reports are usually prepared for financial analysis. They gain a deep understanding and knowledge about the IB work in this role.

The work hour of the analyst is too lengthy. They usually work for 80 to 100 hours per week. Their work is quite strenuous. The age group of people who usually fall under this category are 22-27 years. They usually have to wait for around two to three years for promotion to the next level.

Associate

Associates in IB can either be freshers or are promoted from the analyst level. Candidates who have pursued a master’s degree or MBA in finance or a related field are eligible for the role of associate directly. They skip the analyst role.

The associates also perform the same job roles as the analysts with additional responsibilities. They also prepare Excel and PowerPoint presentations. Their additional responsibilities include guiding the analysts or sometimes instructing them to do work. Associates are responsible for preparing pitchbooks that are usually used by the Vice Presidents and Directors for approaching the clients at the time of selling the bank services. The associates also handle clients and guide them on various financial aspects, financial transactions and what financial service they should opt for. They also handle various queries of clients.

The work hours of associates are usually 70-100 hours per week. They too go through stressful hours. The associate age group is between 25-35 years. After three to four years, they get promoted to Vice President.

Vice President (VP)

It is a very common designation in the IB sector. VPs are no more trainees. They are the senior bankers.

They are responsible for the overall functions of the banks starting from client handling, offering services, assessing risks, being an underwriter and all other related roles. They ensure that financial transactions are going on virtually. Their relationship towards clients determines a lot for the client’s business.

The work hours remain the same for 70-100 hours. The age group may vary from 28-40 years. They need to wait for three to four years for the next upgrade.

Director or Senior VP

This is the desired role of all investment bankers. They are at a higher level than all the other posts.

The director is responsible for the overall function of the bank. They also have proof that they are effective and efficient in bringing business to banks. The portfolio of the director involves a lot of travelling. They are responsible for providing tasks down the level.

Their work hours are a little less compared to others. It may be around 60-80 hours per week. The age at which you can attain this position is between 32-45 years. To jump on to the next level you need to wait for two to three years.

Managing Director (MD):

This is the utmost senior level for an investment banker. He is the king of the team. All employees work as per the MD’s instruction.

They are responsible for the entire business of the bank. They bring in more customers and business for the profit of the bank. The focus is on the bank’s monetary profits and growth.

They do not have any fixed timing of work. The age range is between 35-50 years.

These are the career paths of an investment banker.

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Remuneration of Investment Bankers

The average salary of investment bankers in India.

RolesAverage Base Pay
AnalystINR 11Lacs/Year
AssociateINR 12 Lacs/Year
VPINR 28 Lacs – INR 80 Lacs/Year
DirectorINR 53.1Lacs/Year
MDINR 70Lacs-300 Lacs/Year

Besides the base pay, the salary component of the investment bankers also involves bonuses, joining bonuses and other benefits.

Frequently Asked Questions (FAQ)

1. Are there institutes that offer this course?

There are many institutes. IIM SKILLS is one of the best institutes for this course.

2. Does an investment bank provide stable growth?

Yes, it does. But one needs to have patience and willingness to learn.

3. Does investment banking require computer knowledge?

People with knowledge of computer is preferred.

4. Is there a rapid career growth?

Yes, investment banking provides rapid career growth. Bankers with a deep understanding of the job roles and requirements make a fast-paced career growth.

Conclusion

Investment banking is a vast sector with enormous employment opportunities. However, a candidate should possess the right attitude and willpower to position themselves in this sector. Thus,  this article has concentrated on all the elements that need to be focused on from the aspirer’s point of view. There are many institutes and courses from where you can pursue this course for a better future ahead.

You can visit iimskills.com for details on the professional courses offered.


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