Understanding what is an Investment Banker: We have already seen multiple movies with the protagonist being an investment banker exuding power and money. But no matter how many movies we watch we never found any doing clear justice to the investment banking profession.
Apart from being quit witted and rich we never get a clear picture of what they actually do despite investment banking being one of the most coveted careers. In this article, we cover what investment bankers really do in order to give better insights into their profession! Keep Reading to find out!
What is an Investment Banker?
An investment banker is someone who works for a large financial institution generally known as an investment bank. But it is obvious that everyone who works for an investment bank doesn’t automatically become an investment banker. Investment bankers services revolve around providing banking services, but instead, they provide these for businessmen, companies, investors, entrepreneurs, etc.
What do These Investment Bankers do?
One of their most important functions remains to help their clients to raise capital by issuing and selling securities (debt and equity) in the primary and secondary markets. They do this for companies and at times even governments.
In addition to this investment banks also provide strategic advice when it comes to mergers and acquisitions, underwriting, brokerage services, asset management, etc. Now let us take a closer look at the services provided by these investments bankers:
Raising Capital from the Stock Market
There comes a time when every company has to look outside to raise funds. This could be to build factories or take on other projects to spur growth that requires huge funds. At times even government looks to raise funds in order to build highways, construct airports, etc. Two of the major sources available to these entities in order to raise funds remain debt and equity.
Raising Capital Through Debt
One of the most important sources of raising capital in the stock market is debt. In the stock market debt is raised by selling corporate bonds to investors. Here the company issues bond securities that are bought by investors. Investors in turn receive a fixed interest (yield) which is paid by the company for holding the bond.
When the bond term ends the company pays back the initial principal amount invested by the investors. Here in order to issue bonds companies and government work with investment bankers. Here the investment bankers advice is based on their expertise and research of investment bankers.
The advice these entities on bond specifics like how long the bond must be issued for, the yield it should payout, etc. At times the investment bank may also buy the entire issue of the bond and then offer them for sale.
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Raising Capital Through Equity
The most important source of funding in the market remains equity funding! Similar to the example we’ve seen above companies can also resort to equity financing when in need of funds. New companies do so by launching their Initial Public Offering (IPO).
One of the initial steps in the process involves hiring investment bankers. At the end of the investment managers are process experts when it comes to this! These investment banks help the company prepare a detailed prospectus explaining everything about the company to prospective investors.
In addition to this, another important role that the investment banker performs is pricing the IPO. This is important as an IPO priced too high may fail to attract investors. On the other hand, if the IPO prices are too low will be unfair to the promoters. Hence the investment bankers help the company set the optimal price.
Underwriting
As we have seen above in the case of issuing bonds and equities there lies a huge risk of investors not being interested in the company. This is again where the investment banks step in. They take on the risk and buy a certain percentage of the shares or bonds offered in case the offering goes sideways. Investment bankers in this case are also known as underwriters.
Mergers and Acquisitions
When it comes to Mergers and Acquisitions investment bankers play an important role in advising their clients. Here there exist two sides in acquisitions, the first being the company looking to acquire another smaller company. Here the investment bankers appointed advice the acquiring company on the fair value to be paid and the most optimal structure for the deal.
On the other hand, the investment bankers appointed by the company being acquired advise their clients on what their company should expect and a reasonable price. They help them judge if the offer they have received is reasonable or not. This generally involves both parties going back and forth until both parties agree at an optimal price.
This also takes place in the case of mergers. This generally involves a lot of planning, lengthy negotiations before the lengthy merger and acquisition actually takes place.
In Closing
We already know that investment banking is one of the most prestigious careers to be in. But at the same time, we have also been drilled with the horrors of investment bankers putting in 100 hours of work per week to meet deadlines. At least now you know why.
Looking at the roles an investment bank plays the responsibilities on their shoulders also increase. But however, this is not how every other week goes for an investment banker. Let us know in the comments below what you think about this article explaining what investment bankers do. Happy Reading!
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.
