It’s funny to see how people look at the investment banking job description and get more confused. So, what do you guys do, really? Here is my attempt to answer the question in plain English.
Investment banks help corporations and governments improve their way of using and managing money.
These banks have 2 main roles:
Investment banks assist their clients to raise money through stock or bond offerings. The proceeds can be used for expansion, new investments or repay old and expensive debts. Alternatively, i-banks can help companies spend idle cash by buying back stock/debt at a good price.
Investment banks advise their clients on certain strategic moves such as buying or selling a business, and restructuring business lines to improve profitability. In many cases the strategic move (e.g. acquisition) requires concurrent capital raising exercise described above.
This is what bankers do in boutique investment bank; but for large global banks they have two additional divisions that work closely together.
Typically known as Investment Banking, this division is responsible for the Capital Raising and Advisory work mentioned above.
2. Sales and Trading
This division is responsible for buying and selling financial products for their Institutional clients to earn the “spread”. Institutional clients are mostly hedge funds, pension funds and other mutual funds. The “spread” means the difference between the buying and selling price) and commission.
Financial products include plain-vanilla stocks and bonds, together with convertible bonds, high yield bond and other fixed-income products, foreign currencies, commodities, and derivatives (structured products).
This division also works hand-in-hand with Corporate Finance in stock / bond offerings: Their Institutional Sales Team is responsible for promoting these stock/bond to their clients.
A few big Investment Banks have Proprietary Desk which uses the firm’s own money to buy and sell financial products. This is a high risk high reward business that can bring glory or demise to the firm. Since the financial crisis most banks have either closed or substantially downsized their proprietary trading business. Goldman remains the best in this trade.
This division is responsible for tracking and writing research reports and make buy/hold/sell recommendations to Institutional clients.
While this is not a revenue-generating division, it has an important role to keep clients in the Sales and Trading department happy.
The research reports are also useful tools for bankers in Corporate Finance to talk to their clients and show how much the i-bank as a whole care about them (especially if it is recommending a buy rating).
You may notice that there are potential conflicts between Corporate Finance and Research. There must be procedure known as the “Chinese Wall” in place to separate the two.
Other than these 3 divisions, a full-serviced Investment Bank may have other front-office operations such as private wealth management, fund management, private equity and even a retail banking arm (e.g. Citibank).
An investment bank also has middle and back-office operations such as credit, treasury, operations, risk management, financial control, internal audit, IT, HR, legal,tax and strategic planning departments.
The opportunities in an investment bank are not limited to the Investment Banking division.
Take your time to talk to recruiters or your contact in the industry to find out the best career for you.