How Does an Investment Bank Work?

 

1x1.trans How Does an Investment Bank Work?

 

Ever wondered what these investment banks actually do?

Here is an article that explains in a simplified manner all that you need to know about the operations of investment banks and roles and working schedules of investment bankers.

What Is an Investment Bank?

“ An investment bank is a financial institution that offers a range of services from financial advisory, underwriting, trading, research, raising capital, issuance of shares and bonds, to advisory on mergers and acquisitions. They are usually involved where large amount of money moving happens. “

Typically the clients of an investment banks are large business corporations, but sometimes high net worth individuals (HNIs) may also take these services.

Please do not get confused when you read the term ‘banking’, as investment banking is very different from traditional and commercial banking in terms of their core operations.

However, there is a plethora of traditional and commercial banks that offer investment banking services but not vice versa.

What Do Investment Bankers Do? Investment Banker Job Description

All the activities of an investment banker can be divided into 4 broad categories:

1. Data management

Investment bankers always have to deal with a lot of numbers and a large set of data points.

The nature of work demands an investment manager to be good in number crunching.

It includes collecting data from various sources and storing them in a systematic manner for future reference.

This data can be collected from multiple sources like annual reports, balance sheets, analyst reports, books of records and reported company financials.

2. Financial analysis

It is one of the primary responsibilities of investment bankers to make those numbers talk.

In other words, there is a lot of financial analysis required for deriving conclusions and insights from the collected data.

They use a variety of financial models and tools in their day to day operations.

This is the most time consuming task for investment bankers.

3. Liaisoning

Investment bankers, individually or in a team, need to act as a middleman and coordinate with the clients and the external entities involved.

This activity is particularly true in profiles of mergers & acquisitions and raising funds for the clients.

It involves a lot of communication, both oral and written, between the parties involved.

4. Client management

This is one of the most important responsibilities of an investment banker, especially at a senior position in the organization.

It involves creating reports, presentations and client interface.

Since investment banks work for clients across the globe, investment bankers need to travel a lot to service their clients.

Why Do Investment Bankers Need to Work Long Hours?

1. Work based on client needs

Since nature of the work is such, that investment managers need to work around the client’s schedule and requests, long working hours are a commonplace sight in investment banks.

To serve the clients for urgent and immediate requests, investment bankers are known for burning the midnight oil.

Also, since a lot of work revolves around the stock markets, the actual work of an investment banker typically starts after the markets are closed, and that’s why finishing a day’s work requires staying back in office till late hours of the day.

2. Precision and accuracy

Wherever there is a lot of data involved in the working operations, precision and accuracy is of utmost importance.

Investment managers need to be extra careful about the accuracy of data they work with because even a decimal shift can change the landscape of your analysis.

Thus perfecting the work and making sure that there are absolutely no mistakes in all that number crunching take up loads of time.

3. Very less delegation of work

The kind of services that investment banks offer to their clients, it requires good amount of time and efforts to be spent on getting to put everything in place before the real work starts.

It becomes imperative to make a single person responsible and accountable for major tasks to avoid confusion and element of error, which ultimately leads to long working hours for an investment banker (It does not mean that investment bankers do not work in a team, they do, but they have clearly separated and well defined roles and responsibilities).

How Do Investment Banks Make Money?

Up till now, you have understood what and how do investment bankers work.

Now, let me tell you how they make money in the process. Again the revenues of an investment bank can be bucketed into three broad categories:

1. Charging consulting fee

Most of an investment bank’s revenues come as a pre-decided and fixed amount that they charge to the client. The costing is usually done by two methods:

a. Effort based:

During the initial discussion and scope definition, investment banks would present the estimated efforts that they would put in for a particular project.

They usually charge a fixed rate on per day or a per hour basis for the total duration of the project.

b. Value based:

In this method, the investment banks would charge the client a certain percentage of the value of money involved in a project.

This method is most commonly used in deal of mergers and acquisitions and issuance of bonds and shares in the stock market.

2. Interest on funds raised

One of the services that investment banks provide is raising funds for their clients.

This money can either be raised from an external party or from within the investment banks.

For the first case, they would charge a certain percentage as a fee to help them raise that fund.

In the second case, they would earn interest on the loan provided to the client.

Typically, this is a recurring income till the time the loan is completely paid by the client, but in a few cases it can also be bulk payment at the beginning of the loan issuance.

3. Commission

This is particularly true in case an investment bank provides trading services to the client.

They would charge a certain percentage on all transactions that they do on the client’s behalf.

There are usually slabs of different percentages depending on the value of a transaction. This again is a recurring income for investment banks.

Conclusion

This article gives you clarity on topics like how investment banks actually work, what is an investment bank, what do investment bankers do, why do investment bankers need to work long hours, and how do investment banks make money.

If you have any questions please feel free to write back.

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