What I do in a Investment Banking and what are the day to day roles of Investment Banker ?

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Understanding Investment Banking: A Look Back and a Glimpse into the Future

On October 27th, 1986, London witnessed a financial revolution known as the "Big Bang." In a bid to make financial services more competitive, the UK government deregulated and opened up the industry to international players. This move transformed London into a global financial powerhouse, rivaling even Wall Street.

The 1980s were a time of explosive growth for the banking sector. Advances in technology and increasingly open markets created an environment where the industry thrived like never before. A career in finance during this era was synonymous with wealth and prestige.

Fast forward thirty years, and the landscape has changed dramatically. Investment banking, once the epitome of success, is now facing a crisis of reputation. Public trust in bankers has plummeted, and the industry is often criticized for its role in economic scandals and the excessive bonuses it offers.

What is Investment Banking?

Investment banking is a specialized segment of banking that helps companies and individuals raise capital and offers various financial advisory services. Typical clients include corporations, governments, pension funds, private equity firms, institutional investors, and hedge funds.

In the U.S., investment banks are regulated by the Securities and Exchange Commission (SEC), and majorly in India by SEBI (Merchant Bankers) and RBI and a lot of other authorities in pieces ensuring that they operate within the legal framework established by laws like the Glass-Steagall Act of 1933. This act was initially designed to separate safe banking practices from riskier activities, although it was repealed in 1999, allowing banks to merge these functions once again.

Key Functions of Investment Banking

Investment banks offer a range of services, each playing a vital role in the financial ecosystem. Here are the top five functions:

  1. Arranging Financing
    When a company needs funds for a major project, such as building a factory, investment banks help by planning bond issuances, setting prices, completing regulatory documents, and assisting in selling the bonds.

  2. Equity Financing
    During an initial public offering (IPO), investment bankers are involved in every stage, from drafting the prospectus to securing regulatory approval and pricing the offer correctly.

  3. Underwriting Deals
    Investment bankers often underwrite deals, taking on the risk of buying shares directly from issuers and selling them to the public or institutional clients.

  4. Arranging Private Placements
    For companies that prefer not to go public, investment bankers arrange private placements, leveraging their contacts and credibility to successfully complete the sale.

  5. Negotiating Mergers and Acquisitions (M&A)
    Investment bankers play a crucial role in negotiating and structuring mergers and acquisitions, ensuring that the deal is fair and beneficial for all parties involved.

The Role of Investment Banks in the Economy

Investment banks are not just about making profits—they are vital to the broader economy. Here’s how:

  • Capital Formation: Investment banks mobilize small and large savings, making them available for investments in the capital market.
  • GDP Growth: By facilitating investments, they contribute to the growth of a country’s gross domestic product (GDP).
  • Infrastructure Development: Investment banks help fund and conduct feasibility studies for large infrastructure projects.
  • Employment Opportunities: The growth of investment banking creates jobs, contributing to overall economic development.
  • Liquidity: By matching sellers with investors, investment banks add liquidity to financial markets, making them more efficient.

Pursuing a Career in Investment Banking

A career in investment banking is both lucrative and challenging. Investment bankers work long hours and face high stress, but the rewards can be substantial. As of August 2023, the average salary for an investment banker in the U.S. was $139,749 per year, according to Glassdoor.

Essential Skills for Investment Bankers

To succeed in investment banking, you need a strong set of skills:

  • Financial Modeling: From discounted cash flow (DCF) to leverage buyout (LBO) models, mastering financial modeling is crucial.
  • Presentations and Pitch Books: Creating compelling presentations is key to winning new clients.
  • Business Valuation: Understanding how to value a business accurately is essential for setting fair deal prices.
  • Sales and Business Development: Strong sales skills are critical for acquiring and retaining clients.
  • Negotiation: Effective negotiation can make or break a deal, so it’s a vital skill for investment bankers.
  • Transaction Documentation: Handling complex documents like confidential information memorandums (CIMs) and NDAs is part of the job.
  • Relationship Management: Building and maintaining strong client relationships is essential for long-term success.

Investment banking may have its challenges, but it remains a cornerstone of the global economy, driving growth, creating opportunities, and enabling innovation. Whether you’re considering a career in this field or just looking to understand its impact, investment banking plays a role that cannot be ignored.

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