It’s funny to see how people look at the investment banking job description and get more confused. So, what do investment bankers do, really? Here is my attempt to answer the question in plain English.
Investment banks help corporations and governments improve how they use and manage money.
These banks have two main roles:
Investment banks assist their clients in raising money through stock or bond offerings. The proceeds can be used for expansion, new investments, or repaying 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 the concurrent capital-raising exercise described above.
This is what bankers do in boutique investment banks. But large global banks 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.
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 bonds, 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. The Institutional Sales Team promotes these stocks/bonds to their clients.
A few big Investment Banks have a 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 making buy/hold/sell recommendations to Institutional clients.
While this is not a revenue-generating division, keeping clients in the Sales and Trading department happy is important.
The research reports are also useful tools for bankers in Corporate Finance to talk to their clients and show how much the i-bank cares about them (especially if it recommends a buy rating).
You may notice that there are potential conflicts between Corporate Finance and Research. There must be a procedure known as the “Chinese Wall” to separate the two.
Besides these three 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 industry contact to find the best career for you.