Investment Banker

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What is an 'Investment Banker'

An investment banker is an individual who works in a financial institution that is in the business primarily of raising capital for companies, governments and other entities, or who works in a large bank's division that is involved with these activities, often called an investment bank. Investment bankers may also provide other services to their clients such as mergers and acquisition advice, or advice on specific transactions, such as a spin-off or reorganization. In smaller organizations that do not have a specific investment banking arm, corporate finance staff may fulfill the duties of investment bankers.

BREAKING DOWN 'Investment Banker'

Investment bankers often work at investment banks, the largest of which are Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan Chase (JPM), Bank of America Merrill Lynch (BAC) and Deutsche Bank (DB). Whether or not they work for a true investment bank, investment bankers assist in large, complicated financial transactions. This may include advice as to how much a company is worth and how best to structure a deal if the investment banker’s client is considering an acquisition, merger or sale. It may also include the issuing of securities as a means of raising money for the client groups, and creating the documentation for the Securities and Exchange Commission necessary for a company to go public.

The Role of an Investment Banker

Generally speaking, the investment banker will save the company in question time and money by identifying risks associated with a project before the company moves forward. In theory, the investment banker is an expert in his or her field who has a finger on the pulse of the current investing climate, so businesses and institutions turn to investment bankers for advice on how best to plan their development, as investment bankers can tailor their recommends to the present state of economic conditions.

An investment banker serves as a facilitator between a company and investors when the company wants to issue stock or bonds. The investment banker assists with pricing financial instruments so as to maximize revenue and with navigating regulatory requirements. Often, when a company holds its initial public offering (IPO), an investment bank will buy all or much of that company’s shares directly from the company. Subsequently, as proxy for the company holding the IPO, the investment bank will sell the shares on the market. This makes things much easier for the company itself, as they effectively contract out the IPO to the investment bank. Moreover, the investment bank stands to make a profit, as it will generally price its shares at a markup from the price it initially paid. Yet, in doing so the investment bank also takes on a substantial amount of risk. Though experienced analysts at the investment bank use their expertise to accurately price the stock as best they can, the investment bank can lose money on the deal if it turns out they have overvalued the stock, as in this case they will often have to sell the stock for less than they initially paid for it.

For example, suppose that Pete’s Paints Co., a chain supplying paints and other hardware, wants to go public. Pete, the owner, gets in touch with Jose, an investment banker working for a larger investment banking firm. Pete and Jose strike a deal wherein Jose (on behalf of his firm) agrees to buy 100,000 shares of Pete’s Paints for the company’s IPO at the price of $24 per share, a price at which the investment bank’s analysts arrived after careful consideration. The investment bank pays $2.4 million for the 100,000 shares and, after filing the appropriate paperwork, begins selling the stock for $26 per share. Yet, the investment bank is unable to sell more than 20% of the shares at this price and is forced to reduce the price to $23 per share in order to sell the remaining shares. For the IPO deal with Pete’s Paints, then, the investment bank has made $2.36 million [(20,000 x $26) + (80,000 x $23) = $520,000 + $1,840,000 = $2,360,000]. In other words, Jose’s firm has lost $40,000 on the deal because it overvalued Pete’s Paints.

Investment banks will often compete with one another for securing this kind of IPO project, which can force them to increase the price they are willing to pay to secure the deal with the company that is going public. If competition is particularly fierce, this lead to a substantial blow to the investment bank’s bottom line. Most often, however, there will be more than one investment bank underwriting securities in this way, rather than just one. While this means that each investment bank has less to gain, it also means that each one will have reduced risk.

The investment banking field has gained some notoriety over the years because investment bankers are generally very well-paid individuals. Yet, these positions require specific skills, like excellent number-crunching abilities, strong verbal and written communication skills, and the capacity to work very long and grueling hours. Educational requirements usually include an MBA from a top-notch institution and potentially the Chartered Financial Analyst designation as well.

Additionally, investment bankers must be very trustworthy. Since investment bankers can come across highly confidential information on companies in the course of their duties, their ability to respect the confidentiality of such information and not use it for their own benefit or for the benefit of their family and friends is of the utmost importance. As such, investment bankers must abide by their firm's stipulated code of conduct and will generally sign a confidentiality agreement. This code usually contains very restrictive clauses on such matters as the treatment of confidential information. Moreover, there is potential for a conflict of interest if the advisory and trading divisions of investment banks interact, since investment banks generally do business both for themselves and for external clients. As such, the code will often restrict the investment banker's contact with other employees of the firm, especially in these areas.

There is a typical hierarchy of positions in investment banking, which is as follows, from most junior to most senior: Analyst, Associate, Vice President, Senior Vice President, Managing Director.

While investment bankers often work on large asset management projects with other companies, they may engage in wealth management for individuals as well.

For more on investment banking, read What's the Role of an Investment Bank? and The Rise of the Modern Investment Bank.