– What do investment banks really do?
In: Economics
Hi, investment banker here. Banking is the industry of matching people with extra money to people who need money. As a general rule of thumb, think of traditional bankers as dealing with loans, and investment bankers dealing with securities (mostly stocks and bonds).
When companies want to grow, investment bankers help companies find people to buy new stocks and bonds. Investors get the securities, and companies get the money to grow. We take information from the company and use it to create an ‘offering memorandum’ which is basically a powerpoint deck explaining why the company’s stocks or bonds are a great investment. Then, we create a list of people who would potentially be interested in that investment. Then we basically run an auction until the company has sold enough stocks or bonds to meet its goals.
We also help companies do mergers and acquisitions. M&A is basically just buying or selling a majority of the company’s stock to a single entity. The process is very similar, and involves creating offering documents and finding people who would be interesting in acquiring the company.
Investment bankers take a percentage of the transaction as fees, similar to how a real estate agent gets paid. A 0.5% commission on a billion dollar deal is still $5 million in income for the bank. Because fees are so high, and investment bankers may only close one or two deals a year, most of our time is spent soliciting business. We do a lot of ‘free’ analysis, talking to CEOs and CFOs about what is going on the markets and what companies they could acquire, etc. The hope is that if you show them how attentive and thoughtful you are, they will eventually hire you when they need something.
Latest Answers