Banking is a well-known concept where all of us are aware of its primary functions that include deposits and loans, or in other words lending and borrowing. Apart from these, there are other functions in banking. Depending on the clients that the bank caters to and the kind of services they offer them, banking is divided into different segments like Retail Banking and Corporate Banking. Where Retail banking provides services to individuals, Corporate banking provides services to Corporate clients. Investment banking is a special Banking segment since the kind of services offered are different.
What is Investment Banking?
Investment Banking is a segment that offers services like raising capital, Financial Advisory, Underwriting of new Debt, Equity or Security, facilitating Mergers and Acquisitions, and much more for individuals and organizations. Primarily they deal with creating capital for entities and organizations to help them plan and manage the financial aspects of the project. They act as the intermediary between the investors and the entities that need capital for their business or new projects.
Investment Banking is one of the most complex financial mechanisms. Here are the different types of Investment Banking services and functions.
Raising Capital & Security Underwriting
Investment Banks facilitate the issuance of new securities to raise capital for acquisitions, new projects or if the company wants to go public. Banks also underwrite securities through IPOs (Initial Public Offering). The bank makes sure that they find potential institutional investors for the underwritten securities.
Mergers & Acquisitions
One of the most important functions in Mergers and Acquisitions is Business Valuation. It is very important to define the right value of the acquired assets to avoid any losses and risks in the future. Investment Banks help entities with the Valuation, negotiation, pricing, procedure, and structure of the complete transaction and deal. Banks also facilitate the issuance of securities to raise funds and create the documentation for the Securities and Exchange Commission that is required by the company to go public.
Sales, Trading, and Equity Research
Investment Banks offer trading services for existing securities and underwritten securities in the secondary market. For existing securities, banks match the buyers and sellers of the security. They carry out the buying and selling activity out of their own accounts to facilitate the transaction. Banks can also trade the securities underwritten by them at the predetermined price and quantity. Once the security is underwritten, it is the responsibility of the bank to efficiently sell or distribute the underwritten security.
Investment banks guide their clients in investing in the right securities and building an efficient portfolio. The recommendation is made based on the investor’s objective, risk-taking capability, funds available, and duration of the investment. They also help the investors trade the securities and offer tips on when to buy and sell the securities.
An Investment bank helps its clients figure out the different risks involved in acquisitions, investments, and other activities. This may include currency risks, liquidity risks, business risk, investment risk, legal & compliance risk, operational risk, etc. The bank analyses all such risks and accordingly recommends further actions and procedures.
Here are the different Roles for a Career in Investment Banking
Investment Banking Analyst
Investment Banking Associate
Investment Banking Analyst is the base of the organizational hierarchy and mainly consists of fresh students who want to build a career in investment banking. Analysts carry out tasks related to administration, data analysis, documentation, etc. Analytical tasks include working with company data on tools like Excel to perform valuation, credit analysis, create financial models, etc. An analysis is the most complex part of the Analyst’s role.
Investment Banking Associate is a level senior to the Analyst. Candidates who have completed two to three years of work as an Analyst are promoted to the Associate post based on their performance. Candidates who have pursued MBA from top B schools can join as an Investment Banking Associate directly.
Since Investment Banking Associate is a senior role, they supervise the work of the Analysts and analyze the output from the models build by the Analysts. They also manage client relationships by working on the client requirements.
An Investment Banking Associate is promoted as a Vice President after a minimum of three to four years of experience as an Associate. Investment Banking Associates and Analysts work under the supervision of Vice Presidents. The Vice President makes sure that the deals and transactions are heading the right way and decides on what necessary action needs to be taken to make the deal successful. Vice President is responsible for executing the deal with the clients and monitoring the entire process.
Managing Director is the highest level in the organization who looks after the functioning and profitability of the Investment Bank. Managing Director works on building relationships with potential clients and investors to ensure smooth operations and profitability. They need to be strategic decision-makers and up to date with the economy and industry trends to able to provide an appropriate solution to the clients.
Depending on the type of Investment Banking, there are certain Investment Banking Courses that increase your chances of getting hired. Here are the most suitable Investment Banking courses you can pursue:
CFA® Program (Chartered Financial Analyst)
CFA course is the best Investment Banking course if the candidate wants to work in Asset Management, Equity, and funds segment. The CFA course trains you in all the above mentioned segments making you a more potential candidate for the post. Even for career in Finance industry, CFA is considered the best certification course in Finance.
Students can appear for the CFA® exam twice a year, in June and December. The CFA course duration depends on the level of dedication on the candidate’s part. The candidate has to clear all the three levels of CFA and gain relevant work experience to obtain the certificate.
One of the skills that are highly in demand for Investment Banking is Financial Modeling. Banks require hardcore modeling skills while hiring candidates for the post of Analyst and Associate.
Banks conduct a special Investment Bank Modeling Test to test the knowledge and potential of the candidates. This test includes case studies and model building, which are usually complex. To clear the Investment Bank Modeling Test, it is necessary the candidate learns Financial Modeling thoroughly.
The primary motive is to test the ability of the candidate to understand complex financial and accounting terms, ability to structure a model within the stipulated time, ability to work quickly and accurately, ability to use appropriate and advanced formulas in Excel Modeling.