#WHATIS Investment Banking?
Essentially, investment bankers provide financial advice to corporations with the aim to raise money. This advice includes issuing stocks, buying stocks, mergers and acquisitions (M&A), and much more.
Sell-side:
Within an investment bank, the Investment Banking Division, the sales and trading and research divisions would be performing sell-side functions.
Buy-side:
There is a range of buy-side asset managers. They can be roughly categorised into the following:
→ Private equity e.g. KKR, TPG Capital, BGH
→ Hedge funds e.g. Bridgewater Associates, Renaissance Technologies
→ Mutual funds e.g. Pimco, Vanguard
→ Pension funds e.g. AustralianSuper, First State Super (important in Australia because of compulsory superannuation)
→ Infrastructure funds e.g. MIRA, Brookfield
What an investment banker does:
The issuance of stocks is when the shares of a company are sold to investors. The total amount of shares make up the total ownership of the company. You can find companies selling portions of their ownership on the ASX (Australian Securities Exchange).
Helping corporations buy stocks is the other side of that door. A research team investigates investment opportunities and forecasts future trends. Using this information, investment bankers advise their clients on buying stocks safely and efficiently.
Investment bankers make money through a commission from selling stocks or charging fees for their advice on buying stocks.
Key areas in investment banking:
Corporate finance teams help corporations make short and long-term decisions in a way that maximises shareholder value. An IPO (Initial Public Offering) is one of the most common things advised upon. It entails the first time a company’s stock is offered on the stock market, becoming a public company. Companies do this to collect money to rapidly advance themselves.
Several factors play into a successful IPO. A detailed, strategic and comprehensive plan for “use of proceeds” raised in the IPO is crucial to convince potential investors of future prospects. In saying that, it is also important to state achievable and realistic goals — overpromising on milestones often leads to a speedy downfall of a company. Trust and reliability is gained by ensuring a track record of consistently delivering growth with audited financial statements.
Equities is an area that focuses on tracking the stock markets or indices around the world. It follows the ups and downs of share prices and evaluates which companies may be overvalued or undervalued.
An investment banker who is knowledgeable in this field can provide clients with reliable and valid advice on what stocks to buy, hold or share.
Fixed income involves monitoring bonds or derivatives. It is one of the safest (aversion to risk) investments because it returns consistent income at reasonably predictable amounts.
Foreign exchange is about buying and selling currencies for a profit. For example, if in 2018 you bought US$1,000,000 when US$1 was valued at AU$1.23 and sold that amount in 2020 when US$1 was valued at AU$1.73, you would profit AU$897,900. These values are impacted by a country’s economic performance or political stability!
As an investment banker, you would extrapolate trends and follow global affairs to predict which trade would be beneficial to the client in regards to buying or selling certain currencies.
Commodities are tangible products like coffee, oil and gold that are traded at their current or predicted future value and the investment bankers are held responsible to monitor price and advise on any possible trade that would be beneficial for the client. Additionally ,a key factor that encourages the investment in commodities is the security of these assets because they don’t generally follow stock and bond prices
Popularly, investors purchase future contracts on the Goldman Sachs Commodity Index.
Mergers and acquisitions (M&A) involve investment bankers helping a company sell their business or buy a business. If a company finds themselves in a sticky situation, they may resolve to sell their business before further deterioration occurs and if a company finds themselves soaring, they may choose to use the surplus of profit to acquire more business and expand their domain. As an investment banker, it is your responsibility to determine the most reasonable and beneficial price at which a company merges or acquires.
Attributes of a successful investment banker:
- High attention to detail.
- Adaptable and adjustable with the economic trends.
- Accurately extrapolates trends to predict the market cycle months and years in advance.
- Builds meaningful relationships with clients to ensure trust with given advice.
- Takes educated risks.
- Commits to long and strenuous hours of work and uses their spare time wisely (e.g. competitive cycling) to ensure a balanced lifestyle and avoid burning out.
