Investment Banking 101: Understanding the Basics

Investment banking is a financial cornerstone, capital markets and corporate finance. From advising on mergers to underwriting IPOs, its multifaceted role spans capital raising, trading, and risk management. Rooted in financial expertise, investment banking navigates the complex terrain of global finance, steering businesses toward growth and facilitating economic vitality.

By teammarquee . November 30, 2023

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In the dynamic realm of finance, very few fields hold the same significance as investment banking. As a result, startup founders, investors, and career aspirants often find themselves drawn towards this dynamic field. This blog will discuss the investment banking essentials to help you navigate the fundamental principles of this ever-evolving sector.

What is Investment banking? 

Investment banking is a division of financial institutions and banks that help corporations and governments with large and complex monetary transactions such as mergers, IPOs, underwriting and so on. For the facilitation of this process, the people in investment banking roles are called investment bankers. Investment bankers are professionals who help their clients navigate through complex financial transactions and raise capital for their companies and governments. They act as the intermediary between the company and the public investors. 

Corporate Banking vs. Investment Banking 

Both Corporate banking and investment services fall under the broad umbrella of financial service providers and serve similar clients, but it’s important to note that there are several critical differences between the two. While corporate bankers mainly serve corporations, investment bankers serve both corporations and the government. Also, in most cases, governments are the key clients of investment banks. The services offered by corporate banks include management of treasury, managing loans and lines of credit, risk management, and services related to foreign exchange. On the other hand, the services offered by investment banks include equity and debt financing, mergers and acquisitions, sales, and trading. 

Additionally, the relationship between corporate banks and their clients is long-term in nature and helps relinquish their financial needs, but investment banking roles remain confined to a transactional nature, which means that it provides more of a one-time service.

Roles of Investment Banking

People are often confused when distinguishing between an investment bank and an investment banking services division in a commercial bank. To dispel some doubts, let us now understand the roles performed by investment banks:

1) Underwriting Services: Investment bankers help their clients raise money by selling stocks or bonds to investors. Typically, underwriting is of three main types:

  • Firm Commitment: Here, the underwriter takes complete responsibility for unsold stocks and commits to purchasing any shares that remain unsold.
  • Best Efforts: The underwriter undertakes to sell as many shares as possible at the predetermined offering price but retains the option to return unsold shares to the issuer.
  • All-or-none: If the full issuance cannot be sold at the specified offering price, the agreement is terminated, and the issuing company receives no proceeds.

2) Launching of IPOs: Investment bankers help new companies launch their initial public offering to go public. 

3) Provide Financial Consultation: Investment bankers have expertise in finance, which qualifies them to offer financial consultation and advice to corporations and even governments. They assist their clients in raising money by floating a bond, negotiating, issuing a stock, etc. 

4) M&A Advisory Services: Investment bankers play a central role for companies seeking to acquire another company through mergers or acquisitions. They facilitate mergers and acquisitions as they have specialized knowledge in company valuation, investor communications, and deal negotiations. 

5) Facilitation of Sales & Trading: Investment banking professionals have in-depth knowledge of markets and securities and assist corporations with sales and trading. They assist clients by generating orders, facilitating trade, and managing risk. 

Investment Banking Skills: 

Below are some essential skills required for investment banking:- 

1) Analytical skills: This requires the ability to analyze data, thus helping your client make an informed decision. Moreover, investment banking requires you to have excellent problem-solving skills to ensure client satisfaction. Additionally, data analysis allows for the prediction of his/her decision. 

2) Financial skills: It is crucial to have an understanding of financial models like discounted cash flow (DCF) models, LBO models, and business valuations. These skills help with complex financial transactions and data interpretation. Knowledge and expertise in investment products such as IPO foreign exchange is also required. 

3)   Market analysis: It is highly important to be familiar with current market trends. Moreover, thorough market research should be an investment banker’s foremost goal. 

4)   Crafting pitch decks and presentations: This involves constructing compelling pitches and PowerPoint slides for potential clients and securing new business opportunities.

5)    Creating transaction documents: It encompasses the development of essential papers like a confidential information memorandum (CIM), investment teaser, term sheet, confidentiality agreement, etc.

Careers in Investment Banking: 

Investment banking is a highly-paying career option, but it can sometimes be challenging and stressful. Yet, it is a good profession for those interested in finances and the market. Additionally, acquiring a bachelor’s degree in finance and an MBA degree is important to proceed on investment banking career paths

Here are some investment banking career paths:- (in the sequence of progression) 

Investment Banking Analyst: This is the starting level position when entering this field. At this stage in your career, your duties will primarily consist of compiling reports, collecting data, researching potential ventures, and then passing this information on to your seniors for further investigation. 

Investment Banking Associates: This position requires a lot of hands-on experience and requires you to assist junior analysts and report their findings to superiors.

Vice president, directors, etc. Their jobs primarily consist of maintaining positive relationships with the client as they form the company’s public perception. They remain involved in sales marketing and client relationships.

CFOs/CEOs: They control all the elements of ongoing operations and ensure no errors are committed. CFOs and CEOs have the highest amount of responsibility as they manage relations with the public, manage client relationships and strive towards meeting long-term goals. 

Summing Up:

Investment banking is crucial in the financial world as it is the basic means of carrying out complex transactions such as equity financing, debt financing, underwriting, etc. We hope this article helped you understand the basics of investment banking. Additionally, the job market for investment banking is well-paying and not restrictive. With good knowledge of the field and industry experience, one can make a name for themselves in investment banking.

If you are a corporation or a startup looking for investment banking services, then we at Marquee Equity are here to help. Connect with our team to learn more. 

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