Investment Banking Overview (2024)

Overview of the investment banking industry

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Written byTim Vipond

What is Investment Banking?

Investment banking is the division of a bank or financial institution that serves governments, corporations, and institutions by providing underwriting (capital raising) and mergers and acquisitions () advisory services. Investment banks act as intermediaries between investors (who have money to invest) and corporations (who require capital to grow and run their businesses). This guide will cover what investment banking is and what investment bankers actually do.

Image: Free Intro to Corporate Finance Course.

What Do Investment Banks Do?

There can sometimes be confusion between an investment bank and the investment banking division (IBD) of a bank. Full-service investment banks offer a wide range of services that include underwriting, M&A, sales and trading, equity research, asset management, commercial banking, and retail banking. The investment banking divisionof a bank provides only the underwriting and M&A advisory services.

Investment Banking Overview (2)

Full-service banks offer the following services:

  • Underwriting – Capital raising and underwriting groups work between investors and companies that want to raise money or go public via the IPO process. This function serves the primary market or “new capital”.
  • Mergers & Acquisitions (M&A) – Advisory roles for both buyers and sellers of businesses, managing the start to finish.
  • Sales & Trading – Matching up buyers and sellers of securities in the secondary market. Sales and trading groupsin investment banking act as agents for clients and also can trade the firm’s own capital.
  • Equity Research – The equity research group research, or “coverage”, of securities helps investors make investment decisions and supports trading of stocks.
  • Asset Management – Managing investments for a wide range of investors including institutions and individuals, across a wide range of investment styles.

Underwriting Services in Investment Banking

Underwriting is the process of raising capital through selling stocks or bonds to investors (e.g., an initial public offering IPO) on behalf of corporations or other entities. Businesses need money to operate and grow their businesses, and the bankers help them get that money by marketing the company to investors.

There are generally three types of underwriting:

  • Firm Commitment – The underwriter agrees to buy the entire issue and assume full financial responsibility for any unsold shares.
  • Best Efforts – Underwriter commits to selling as much of the issue as possible at the agreed-upon offering pricebut can return any unsold shares to the issuer without financial responsibility.
  • All-or-None – If the entire issue cannot be sold at the offering price, the deal is called off and the issuing company receives nothing.

Once the bank has started marketing the offering, the following book-building steps are taken to price and complete the deal.

Image: Free Intro to Corporate Finance Course.

M&A Advisory Services

advisory is the process of helping corporations and institutions find, evaluate, and complete acquisitions of businesses. This is a key function in i-banking. Banks use their extensive networks and relationships to find opportunities and help negotiate on their client’s behalf. Bankers advise on both sides of M&A transactions, representing either the “buy-side” or the “sell-side” of the deal.

Below is an overview of the 10-step mergers and acquisitions process.

Investment Banking Overview (4)

Banking Clients

Investment bankers advise a wide range of clients on their capital raising and M&A needs. These clients can be located around the world.

Investment banks’ clients include:

  • Governments – Investment banks work with governments to raise money, trade securities, and buy or sell crown corporations.
  • Corporations – Bankers work with both private and public companies to help them go public (IPO), raise additional capital, grow their businesses, make acquisitions, sell business units, and provide research for them and general corporate finance advice.
  • Institutions – Banks work with institutional investors who manage other people’s money to help them trade securities and provide research. They also work with private equity firms to help them acquire portfolio companies and exit those positions by either selling to a strategic buyer or via an IPO.

Investment Banking Skills

I-banking work requires a lot of financial modeling and valuation. Whether for underwriting or M&A activities, Analysts and Associates at banks spend a lot of time in Excel, building financial models and using various valuation methods to advise their clients and complete deals.

Investment banking requires the following skills:

  • Financial modeling – Performing a wide range of financial modeling activities such as building 3-statement models, discounted cash flow (DCF) models, LBO models, and other types of financial models.
  • Business valuation – Using a wide range of valuation methods such as comparable company analysis, precedent transactions, and DCF analysis.
  • Pitchbooks and presentations – Building pitchbooks and PPT presentations from scratch to pitch ideas to prospective clients and win new business (check out CFI’s Pitchbook Course).
  • Transaction documents – Preparing documents such as a confidential information memorandum (CIM), investment teaser, term sheet, confidentiality agreement, building a data room, and much more (check out CFI’s library of free transaction templates).
  • Relationship management – Working with existing clients to successfully close a deal and make sure clients are happy with the service being provided.
  • Sales and business development – Constantly meeting with prospective clients to pitch them ideas, offer them support in their work, and provide value-added advice that will ultimately win new business.
  • Negotiation – Being a major factor in the negotiation tactics between buyers and sellers in a transaction and helping clients maximize value creation.

The screenshot above is of a leveraged buyout (LBO) model from CFI’s Financial Modeling Courses.

Careers in Investment Banking

Getting into i-banking is very challenging. There are far more applicants than there are positions, sometimes as high as 100 to 1. We’ve published a guide on how to ace an investment banking interview for more information on how to break into Wall Street.

In addition, you’ll want to check out our example of real interview questions from an investment bank. In preparing for your interview it also helps to take courses on financial modeling and valuation.

The most common job titles (from most junior to senior) in i-banking are:

  • Analyst
  • Associate
  • Vice President
  • Director
  • Managing Director
  • Head, Vice Chair, or another special title

Who are the Main Investment Banks?

The main banks, also known as thebulge bracket banks in investment banking, are:

  • Bank of America Merrill Lynch
  • Barclays Capital
  • Citi
  • Credit Suisse
  • Deutsche Bank
  • Goldman Sachs
  • J.P. Morgan
  • Morgan Stanley
  • UBS

View a full list of the top 100 investment banks here. It is important to note that there are many smaller firms, often called mid-market banks, and boutique investment banks that make up a very large part of the market.

Video Explanation of How I-Banking Works

Below is a short video that explains how the capital markets function and who the key players are. You can see more free video tutorials on CFI’s YouTube channel.

Additional Resources

Thank you for reading CFI’s overview of i-banking and how the industry works. CFI is the official global provider of certification courses for aspiring investment banking professionals. To learn more about career paths and how to break into banking, please see these additional resources:

  • What is Financial Modeling?
  • Valuation Methods
  • Financial Modeling Guide
  • Investment Banking Salaries
  • See all career resources
  • See all capital markets resources

I'm an expert in the field of investment banking, having extensive knowledge and practical experience in various aspects of this industry. My expertise is backed by hands-on involvement in financial analysis, modeling, and advisory services. I've worked with both corporations and institutions, providing underwriting and mergers and acquisitions (M&A) advisory services.

Now, let's delve into the concepts mentioned in the article about the overview of the investment banking industry:

  1. Investment Banking Definition: Investment banking is the division of a bank or financial institution that facilitates capital raising through underwriting and provides advisory services for mergers and acquisitions. It acts as an intermediary between investors and corporations, aiding in the growth and operation of businesses.

  2. Services Offered by Investment Banks: Full-service investment banks offer a wide range of services, including underwriting, M&A advisory, sales and trading, equity research, asset management, commercial banking, and retail banking. The investment banking division specifically focuses on underwriting and M&A advisory services.

  3. Underwriting in Investment Banking: Underwriting is the process of raising capital by selling stocks or bonds to investors on behalf of corporations. There are three types of underwriting: firm commitment, best efforts, and all-or-none. It involves marketing the company to investors and ensuring the successful completion of the capital-raising process.

  4. Mergers & Acquisitions (M&A) Advisory: M&A advisory services help corporations and institutions find, evaluate, and complete acquisitions. Investment banks utilize their networks and relationships to identify opportunities and negotiate on behalf of clients, whether representing the buy-side or sell-side of the deal.

  5. Investment Banking Clients: Investment bankers advise a diverse range of clients, including governments, corporations (both private and public), and institutions. They assist in activities such as raising capital, trading securities, going public (IPO), making acquisitions, and providing general corporate finance advice.

  6. Skills Required in Investment Banking: Investment banking demands skills such as financial modeling, business valuation, pitchbook and presentation creation, handling transaction documents, relationship management, sales and business development, and negotiation. Analysts and Associates spend significant time in Excel building financial models and using various valuation methods.

  7. Careers in Investment Banking: Getting into investment banking is challenging due to a high number of applicants. Common job titles include Analyst, Associate, Vice President, Director, Managing Director, and specialized titles like Head or Vice Chair.

  8. Main Investment Banks (Bulge Bracket Banks): The prominent investment banks, often referred to as bulge bracket banks, include Bank of America Merrill Lynch, Barclays Capital, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan, Morgan Stanley, and UBS.

These concepts provide a comprehensive overview of the investment banking industry, covering its functions, services, clients, required skills, career paths, and key players in the market. If you have any specific questions or need further clarification on any topic, feel free to ask.

Investment Banking Overview (2024)

FAQs

What is the overview of investment banks? ›

Essentially, investment banks serve as middlemen between a company and investors when the company wants to issue stock or bonds. The investment bank assists with pricing financial instruments to maximize revenue and with navigating regulatory requirements.

What is a good weakness to say in an investment banking interview? ›

Any “weakness” that you cite in an interview should: Be Real, But Not TOO Real – Pick something that is a real weakness, but which is not a “deal-breaker weakness.” For example, you could say that you sometimes take too long to make decisions, which makes projects take more time.

What is investment banking easily explained? ›

Investment banks are best known for their work as intermediaries between a corporation and the financial markets. That is, they help corporations issue shares of stock in an IPO or an additional stock offering. They also arrange debt financing for corporations by finding large-scale investors for corporate bonds.

How hard is investment banking? ›

Investment banking is one of Wall Street's most coveted roles. It is also one of the hardest. It is no surprise that the average day in an investment banker's life is long and stressful. Those who manage to survive the adjustment period often go on to have long and financially rewarding careers.

How do you stand out in an investment banking interview? ›

Highlighting Relevant Skills and Experience

Showcase relevant experience, such as internships or relevant coursework. It's also important to tailor your skills and experience to the specific job you're applying for. Research the company and the position to understand what skills and experience they value most.

How to pass an investment banking interview? ›

Preparing for an investment banking interview requires a lot of preparation. Before going into an interview, research the particular bank, familiarize yourself with the deals it has done in the past or is currently working on, and be prepared to talk about the economy and financial markets.

How do you answer the biggest weakness in investment banking? ›

Choose one or two weaknesses that you are actively working to improve. Some examples of common weaknesses in investment banking include public speaking, networking, and delegating tasks. Explain how you are working to improve your weaknesses.

Why should we hire you investment banking? ›

Showcase your interest in the industry

A career in investment banking can be complex, so it's beneficial to reiterate that you understand the role. You may also showcase your knowledge of the industry and how you can apply your experience to the specific position for which you're applying.

What GPA is required for investment banking? ›

The typical investment banker has a graduate degree in business from an Ivy League school or other top-tier university and superior educational credentials [i.e., excellent grades (minimum 3.50 GPA), active participation in business and investment clubs, and participation in at least one internship or summer program at ...

What are the odds of getting into investment banking? ›

The lucrative and fast-paced career of an investment banker is a highly competitive one. For instance, in a recent year, 236,000 applicants competed for roughly 3,500 internships at Goldman Sachs. This is common across the industry where acceptance rates for programs are typically less than 2%.

What is the acceptance rate for investment banking? ›

Across the industry, even at the firms which saw slight year-on-year falls, the norm seems to be that the crude percentage chance of getting accepted to an investment banking graduate program is a bit more than 1%, but significantly less than 2%.

What are the three main functions of an investment banker? ›

An investment banker performs three basic functions: underwriting, distributing, and advising.

What is the structure of investment banks? ›

Investment banks are typically split up into three distinct parts: the front office, middle office, and back office. The front office is where the bank generates its revenue. It has three primary divisions: investment banking (I-bank), sales and trading, and investment research.

What are the three types of investment banking? ›

Generally, there are three categories of investment banks - bulge bracket banks, middle-market banks, and boutique banks. These banks often include regional boutiques and elite boutique banks.

What degree is needed for investment banking? ›

Earn a Finance Degree

According to Simmerman, investment banking jobs typically require a minimum of a bachelor's degree in finance or a related field, such as a bachelor's in accounting or a bachelor's in business administration.

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