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What is an 'Investment Banker'

An investment banker is an individual who often works as part of a financial institution and is primarily concerned with raising capital for corporations, governments or other entities.

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 an investment banker is affiliated with such a firm, he or she will assist in large, complicated financial transactions. These may include structuring an acquisition, merger, or sale for a client or group of clients. A core task also includes the issuing of securities as a means of raising money. This involves creating detailed documentation for the Securities and Exchange Commission (SEC), necessary for a company to go public.

An investment banker can save a client time and money by identifying risks associated with a particular project before a 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. Businesses and non-profit institutions often turn to investment bankers for advice on how best to plan their development.

The Investment Banker and the IPO

The investment banker assists with pricing financial instruments and 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, acting as an intermediary. In this case, acting on behalf of the company going public, the investment bank will subsequently sell the company’s shares into the public market, creating immediate liquidity.

An investment bank also stands to make a profit in this scenario, generally pricing its shares at a markup from what the firm 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, an investment banker can lose money on the deal if they have overvalued the shares.

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 Katherine, a prominent investment banker, working for a larger firm. Pete and Katherine strike a deal, in which Katherine (on behalf of her firm) agrees to buy 100,000 shares of Pete’s Paints for the company’s IPO at the price of $24 per share, based on recommendations from her team of analysts. The investment bank pays $2.4 million for the 100,000 shares. After filing the appropriate paperwork, such as SEC Form S-1, and setting the date and time of the IPO, Katherine and her team begin selling the stock into the open market at $26 per share. Yet, the investment bank is unable to sell more than 20% of the shares at this price, given weak demand, and is forced to reduce the price to $23 in order to sell the rest of the holdings. This ultimately leads to a loss for Katherine and her team.

Investment banks will often compete with one another for securing IPO deals as they can be highly lucrative, and increase what they offer per-share to a company or non-profit client. In a larger deal, there will often be more than one investment bank underwriting securities, creating a syndicate. While each investment bank has less to gain in this scenario, it also reduces the risk for all involved.

Skills and Requirements to Be an Investment Banker

The investment banking field has gained interest over the years as investment bankers are generally very well-paid. 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 (CFA) designation.

As such, investment bankers are required to abide by their firm's stipulated code of conduct and will generally sign a confidentiality agreement, given the sensitive nature of the information they receive. Moreover, there is potential for a conflict of interest if the advisory and trading divisions of investment banks interact.

A hierarchy of positions typically exists in investment banking, which follows (from junior to senior): analyst, associate, vice president, senior vice president, managing director.

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