You're an analytical thinker, and you look good in a suit, which prompts you to wonder, "What does an investment banker do?" We understand where you're coming from. Investment banking is a highly sought-after career option.
But if you're smart, you probably know that there's a good reason why investment bankers earn six-figures yearly. They work hard. But what is it that they do precisely? Keep on reading to find out the answer to "what does an investment banker do?"
What Is An Investment Bank?
Before we can answer the question "what does an investment banker do," we need to clarify the function of an investment bank. After all, most investment bankers work for investment banks.
An investment bank is a banking institution that operates in high finance. For example, when a company wants to raise additional capital for expansion, it more often than not chooses to sell stocks and bonds.
However, special expertise is needed to execute these financial transactions successfully. That's where investment banks come in. Investment banks find buyers for a company's stocks and bonds. Furthermore, they deal with all the paperwork.
But that's not all. Investment banks also assist with mergers and acquisitions and provide financial advisory services. Trading and sales, asset management, and wealth management are an investment's bank's additional sources of income. Not everyone that works at an investment bank is an investment banker, though.
Your Role Depends On Your Position
The answer to "what does an investment banker do?" depends, at least partially, on the position that an investment banker holds.
Investment bankers tend to progress along a standard career path that goes something like this:
Analysts and associates are junior bankers. Usually, analysts are either undergraduates or individuals with experience in finance. Either way, they're new to investment banking.
Typically, it takes analysts a couple of years to earn a promotion. However, at times, they might need to gain additional education. Most investment banks want their associates to have an MBA.
Analysts and associates spend their days doing basic research and compiling reports. Analysts do most of the grunt work, whereas associates assign this work and check it. Furthermore, associates also act as a link between junior bankers and senior bankers.
Most associates are promoted to Vice President within four years. Vice Presidents supervise analysts and associates and interact with clients.
Directors supervise teams in their area of expertise. Moreover, they solicit clients and handle client relationships.
Managing directors are the bank's leading "salespeople." Their main task is to attract new clients. However, they also serve as the primary contact person for valuable existing clients.
As you climb the corporate ladder, you move away from labor-intensive tasks such as generating reports and move towards cultivating relationships with clients.
What Does An Investment Banker Do?
Investment bankers assist in complicated financial transactions. For example, companies and non-profit institutions often seek an investment banker's advice before they feel confident enough to go ahead with planned developments.
By identifying risks associated with each project, investment bankers save their clients both time and money.
But that's just a basic answer to "what does an investment banker do?" Let's go into a bit more detail.
5 Responsibilities Investment Bankers Share
Most investment banks split their employees into working groups that cover particular market sectors or industries. Separate teams are generally assembled to handle specific projects.
The exact responsibilities of an investment banker depend on the bank that he or she works for as well as the industry category and division their bosses assign them to.
Nonetheless, there are certain responsibilities that all, or almost all, investment bankers share.
PowerPoint and Excel are an investment banker's best friends
Preparing pitch books is just one of the responsibilities that we have to mention when answering the question "What does an investment banker do?"
A pitch book is a report that aims to explain why a client should choose the investment bank in question to handle a specific project or transaction. Pitch books are a collaborative project between junior bankers and senior bankers.
Generally, the managing director meets with the directors (or vice presidents) to create the outline of the pitch book. Then, the vice president (or the director) drafts the structure of the pitch.
Finally, the associates work with the analysts in filling the pitch book with relevant numbers and analyses. The pitch book undergoes many alterations before senior bankers approve the final draft.
Senior bankers usually deliver the pitch to the client. Even if junior bankers are present at the meeting, they don't typically say anything. Instead, they take notes. They might also be asked to rustle up additional information.
It's all about the capital
If a company or a government wants to finance the building of a large project (a factory or a highway, for example), it might ask for an investment banker's help in raising capital. Therefore, arranging finance is a suitable answer to "what does an investment banker do?"
Companies can issue both debt and equity to raise capital.
Issuing debt is another term for selling bonds to investors. When an investor purchases a bond, he is loaning either capital or money to the issuing company for a set number of years at a fixed rate of interest. The company that issues bonds makes interest payments throughout the years until the bond term ends. Then, the company returns the principal to the investor.
Generally, companies have no idea where to start when they want to sell bonds. They need investors with lots and lots of money. But they don't know where to find these investors or how to talk to them. Investment bankers have lists of leads that might be interested. Additionally, investment bankers help structure and price the bonds to ensure there's enough demand.
Equity financing is selling shares. When a business decides to raise money by going for an initial public offering (IPO), investment bankers put together a prospectus detailing the terms of the offering as well as its risks.
Furthermore, investment bankers manage the issuance process and help price the offering. Price the shares too high, and the public won't be interested. But price the shares too low, and the company will lose out on extra money.
Taking risks is part of the job description
Underwriting deals is another responsibility that needs mentioning when answering "What does an investment banker do?" Furthermore, it ties in with the above point on arranging finance.
What does it mean when investment bankers underwrite deals? Simply put, they find people who want to buy or invest in securities on behalf of a client.
Investment bankers guarantee that a client's securities will sell for a specific minimum price. But what if there aren't enough people willing to buy the securities at the minimum price? In that case, investment bankers have to sell the securities below the minimum price, thus suffering a loss.
If demand is high, on the other hand, investment bankers sell the securities above the minimum price, thus making a profit.
Most companies couldn't grow without an investment banker's help
Ask an average person, "What does an investment banker do?" and they're very likely to mention mergers and acquisitions.
When a business decides to purchase another business, it often hires an investment banker to find potential companies to buy, value the targeted companies, and provide advice on the acquisition process. The investment banker wants to strike up a deal that is most favorable to the buyer.
Similarly, if a company is about to be sold, an investment banker is hired to find buyers, evaluate the asking price, and weight up the different offers.
There's a lot of reading
Investment bankers spend hours gathering information about companies and drafting reports about their prospects. Consequently, research is another potential answer to the question "what does an investment banker do?"
Research helps investment bankers give useful investment advice to outside clients. If clients follow the advice offered and make a trade through the bank's trading desk, the bank then generates revenue.
Furthermore, research allows investment bankers to stay up to date on topics such as macroeconomics and credit. This knowledge is used both internally and externally when advising clients.
What does fetching coffee have to do with it?
When you first pondered "what does an investment banker do?" you probably thought that it was all exciting deals and aggressive sales calls. But that couldn't be further from the truth.
Investment bankers (especially those in junior positions) spend a good portion of their day tackling tedious tasks. These might include printing documents, preparing notes, organizing meetings, editing reports, and making travel arrangements.
Furthermore, it's not unusual for junior investment bankers to find themselves fixing printers, making restaurant reservations, fetching coffee, and running other boring errands.
Is Becoming An Investor Banker Worth It?
Now that you know the answer to "what does an investment banker do?" you should have a better idea whether or not this career path is for you.
The role of an investment banker is not only prestigious but also well-paid. Besides, the educational requirements are more than doable. While most investment bankers have an MBA, some make do with just a bachelor's degree or even less than that.
However, competition in this field is intense. Every year, applicants far outnumber the job openings. Moreover, individuals interested in making it in high finance require specific skills. Being good with numbers is not enough. Investment bankers also need to be aggressive, quick-witted, cool-headed, and persuasive.
Finally, investment bankers work grueling hours, sacrificing their personal lives for the welfare of the company.
If the drawbacks are not enough to repel you, and if you find high-stake negotiations and the mechanics behind deals exciting, investment banking might be the perfect career for you.
Do you have experience as an investment banker? Want to become one? Sound off in the comments below.