Investment banking continues to be one of the more popular career paths for MBAs, business grads, and other young professionals beginning a career in finance. Investment banking promises high profile work with the potential for highly lucrative compensation. If you’re reading this, there’s a good chance you at least have some peers who are moving toward the field. You may have even already decided investment banking is for you, or you may be starting to consider it. Even if you’re totally oblivious to everything else about investment banking, you’ve probably at least heard it discussed in media coverage of famous IPOs (initial public offerings), mergers, corporate acquisitions, and other Wall Street news.
No matter what your level of experience and education is, this article will serve as a primer on investment banking. It will cover what investment banking is, what investment bankers do, and what you should consider if you’re interested in embarking on an investment banking career.
Table of Contents
- What Is Investment Banking?
- What Does an Investment Banker Do?
- Types of Investment Banking
- How to Become an Investment Banker
- Skills Needed for Investment Banking
- Investment Banking Internship
- Investment Banking Interview Questions
- Investment Banking Resume
- Investment Banking Salary
- Investment Banking Exit Opportunities
What Is Investment Banking
First, even if you think you know everything there is to know about the investment banking scene, let’s start with the basics. What is investment banking? And how do investment banks make money?
Put most simply, investment banking is a service that financial institutions provide in which they act as intermediaries between investors and corporations. Investment banks offer advising and consulting services that influence the financial decisions different kinds of investors and companies make related to the creation and allocation of capital. Investors have capital (or money) to invest, and corporations require capital to operate – investment bankers act as advisers on both sides.
Investment bankers’ clients may include individuals, corporations, governments, NGOs, and other groups looking to invest or to raise capital. Recommendations investment banks may make include launching initial public offerings, selling equities or other bonds or securities, mergers and acquisitions, financial restructuring, and more.
When you hear about public or large private companies making large financial decisions, you can bet an investment bank was part of the deal. This is part of the reason investment banking can be so attractive and so lucrative – investment bankers are at the center of the financial action. This also leads to the field’s reputation for fostering high stress working environments.
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What Does an Investment Banker Do
Okay, so investment banks play a role in large-scale investments and allocations of capital, positioning investment bankers in the middle of the financial landscape. But what does an investment banker do? What are the actual responsibilities of an investment banker day-to-day?
Let’s consider a common kind of financial situation. Say a corporation wants to invest a large amount of money to expand their operation. That corporation may be unlikely to have the necessary cash on hand – therefore, the corporation will need to raise money in order to finance their investment. To do that, the corporation may decide to offer bonds or to sell stock. They will hire an investment bank to help them decide which is best, set the terms of the offer, and find investors in the bond or equity offering.
In either case, first the investment bankers will help run the numbers to determine the actual details of the bond issuance or the equity financing – including how to initially price the bond or stock. This means a more junior investment banking analyst will be building a financial model to understand the value of the company and therefore the appropriate terms of the bond or equity being offered.
From there, the investment banker will plan the rest of the sale, including how to market the bond or stock to potential investors, which will likely involve communicating with and through the media. Investment bankers are also responsible for preparing all the documentation to secure approval from the Securities and Exchange Commission (SEC). In short, investment bankers handle all the actual leg work of the financing, building a bridge between Point A (the investors) and Point B (the institution aiming to secure the financing).
Investment bankers may also provide more specialized services. For example, an investment bank may underwrite the sale of a stock. This means the investment bank takes on the initial risk of financing by buying all the shares outright at an agreed upon price and selling those shares secondarily to investors. This case makes the investment bank’s work in properly pricing the shares extremely important, as the investment bank’s own bottom line is dependent on getting the valuations right.
The service for which investment banking may be best known is Mergers and Acquisitions, as this is some of the most high-profile work a firm can engage in. There are innumerable challenges to one company successfully merging with or acquiring another. Investment bankers can help advise and facilitate this process, especially when it comes to highly contested parts of the deal, such as agreeing to a price.
Types of Investment Banking
Now that you have a basic sense of what investment bankers do, let’s look at the different types of investment banking.
There are three main types of investment bank, differentiated by the institution’s size and the various services it offers to clients.
The largest investment banks are known as bulge bracket banks. These are major international institutions, and the odds are good that most of the banks you’ve heard of fall into this category, including Goldman Sachs, Deutsche Bank, and others.
These banks also tend to work with the largest clients, regularly handling deals that involve billions of dollars. Bulge bracket banks also all tend to offer a full suite of services to their clients, including all kinds of financing, trading, asset management, research and issuance of equities, and of course, mergers and acquisitions.
As is probably obvious from the name, middle-market banks occupy an intermediate space between the massive bulge bracket banks and smaller, regional firms. But middle-market banks still handle very large deals, often falling in the range of $50-500 million.
Middle-market banks usually have some degree of international presence, but they aren’t truly global like their bigger bulge bracket cousins. Middle-market banks tend to offer the same full suite of investment banking services as bulge bracket banks, though some tend to specialize in one sector or industry.
The smallest investment banks are called boutique firms, and within this category there are two subtypes: regional boutique and elite boutique.
Regional boutique firms are the smallest category of investment banks in terms of institutional footprint and the types of deals they work on. Regional firms, as the name implies, tend to work most in one region, sometimes even just one city. They also focus on a narrower suite of services and a narrower range of industries, with some focusing on just one kind of service or industry. Regional boutique deals typically do not exceed $100 million, and they usually don’t work with federal governments or multinational organizations.
Elite boutique firms have a larger presence and facilitate larger deals than regional boutique firms, though they still tend to specialize in a narrower range of services and industries.
It’s important to note that investment banks do evolve, and today’s elite boutique firms may, someday, grow to become middle-market or even bulge bracket banks.
How to Become an Investment Banker
Whether all the above information is new or familiar to you, by this point you’re probably mostly interested in learning how to become an investment banker. It’s important to plan your moves strategically, as investment banking can be an extremely competitive field.
Build Your Credentials
Investment banking rewards hard work and can, in some ways, be meritocratic – but to break into the field you’ll still want to do everything possible to build your credentials and maximize the impact of your resume.
The competitive nature of investment banking means employers basically have their pick of the crop when it comes to applicants. To stand out you’ll want to get a competitive degree from a top university. If you’re still choosing a major for your undergrad, you’ll want to pick something highly relevant to investment banking, such as Economics, Finance, or Business.
And even a flashy undergrad degree may not be enough. Getting a post-grad degree, such as an MBA, an MSF (Master of Science in Finance), or another finance-related degree, will go a long way toward helping you impress an employer. A CFA designation can also help.
Skills Needed for Investment Banking
Of course, you could have the most impressive resume in the world, but it won’t help you advance unless you also have the skills needed for investment banking.
Obviously, you’ll need to be mathematically fluent. Investment bankers crunch numbers all day long, and your math game will need to be top-notch to get an edge on your competitors.
You should also work to build your business acumen. Even a math prodigy won’t be able to hack it as an investment banker if they don’t understand the way the numbers apply to real-world business scenarios.
More generally, a successful investment banker will need to be an expert at analytical thinking. Investment bankers are constantly translating between data and situations. You’ll need to be able to read and analyze situations even as they’re subject to innumerable complex conditions.
You’ll also need to be skilled at innovative thinking. Everyone else in the field will have much of the same education and information you do. Being able to think outside the box will help you navigate seemingly insurmountable obstacles and give you the ability to see more moves into the future than your competitors.
Successful investment bankers are also highly diligent and disciplined people. Investment bankers, especially at the beginning of their careers, often put in upwards of 100 hours per week. If you’ve never learned the discipline necessary to survive such a demanding lifestyle, the industry will chew you up and spit you out.
Perhaps the most under looked asset needed for investment banking is good communication skills. Investment bankers don’t just crunch numbers all day. They’re constantly communicating between multiple parties, helping shape the stories that guide investor behavior.
Investment Banking Internship
There’s one crucial part of the path toward an investment banking career we haven’t talked about yet: the investment banking internship.
No matter how good the rest of your resume is, and no matter how skilled you may be, if you really want to get into investment banking, you’ll likely need to secure a competitive internship position at a respected firm.
The right internship will give you exposure to the actual day-to-day workings of the industry, with invaluable on-the-job training. And perhaps most importantly, internships are great opportunities to ingratiate yourself with potential employers. Most of the top undergraduate business schools now have investment banking clubs or workshops geared towards helping members land coveted internships at top firms.
If you do secure an internship, make sure you do everything within your power to build your network. Use every institution you’re a part of to help secure and capitalize upon your investment banking internship. Draw from your social networks and communities to meet people who work in the field, or even people who know people who work in the field. These will be the people you work for or alongside in the future.
Investment Banking Interview Questions
Even if you’ve crafted the perfect set of credentials and built a powerful network, you’ll still need to ace the investment banking interview to land a top position. Let’s consider the investment banking interview questions you’re likely to encounter.
First, the interviewer will surely ask questions designed to assess your general business acumen. These questions may seem to skirt the boundary between granular/technical and general/theoretical, such as: “How do you value a company?” Other questions may go deeper into your technical financial knowledge, for example, asking you about the best discount rate to apply in a specific scenario.
Other questions will provide sample investment banking scenarios and ask for your analysis. So, you’ll want to revisit some of your old textbooks and course notes. There’s not really a great way to fake your way through these questions, so hopefully you paid attention in class! You will also want to engage in a lot of targeted investment banking interview prep.
From there, the interviewer will likely try to assess your knowledge of the current state of the investment banking field. This is where the financial devotee really has a chance to shine, and where it pays off to have been paying attention to the modern financial landscape. The interviewer may ask for your read on a recent deal, either a specific deal of the interviewer’s choosing or one you happened to have studied in some detail.
The interviewer may also ask questions to determine your knowledge of that firm. So, you’ll want to study up on the firm’s history, its day-to-day operations, and any major recent deals or news items.
You can look at these questions as opportunities to display your general education, your passion for the field, your analytical skills, and your communication skills.
For more examples of IB interview questions, check out the 101 investment banking questions and answers guide created by our friends at Wall Street Oasis.
Investment Banking Resume
Before you can even land an investment banking interview, you’ll need to catch an employer’s eye by creating the best possible investment banking resume.
First and foremost, your resume should only be one page. This is an absolute industry standard, and if you can’t find a way to keep your accomplishments from running onto a second page, they may end up being worthless.
Within that one page, you should focus primarily on your academic achievements. Investment bankers need to be smart, competitive, and accomplished, and the way you advertise your educational experience should speak mostly to those criteria. Be sure to mention any awards or honors you may have earned, as well as any leadership positions.
Ideally your experience will allow you to tailor your resume toward relevant experience in the field of finance. This might include academic work, as well as previous jobs and internships. You can include information on student clubs and extracurricular organizations, but this is only likely to help if it’s relevant to finance.
Investment Banking Salary
If you’re interested in investment banking, there’s a good chance that you’re attracted by the promise of a lucrative investment banking salary. But is the compensation really all it’s cracked up to be?
New hires in the field of investment banking often do start out making six figures. And this is just the base salary—that doesn’t reflect the often-lucrative investment banking bonuses many investment bankers receive. Even for junior analysts, these bonuses can effectively double their total compensation. However, new hires are also expected to work extremely long hours, sometimes up to 100 hours per week—so on an hourly basis, the salary is a bit less impressive.
However, if you’re successful, you have a lot more money to look forward to, as senior analysts can make millions or even tens of millions of dollars per year. The lifestyle is incredibly demanding, especially early on. But these figures are realistic and real if you have the stomach for putting in the work to continue to progress in the industry.
Investment Banking Exit Opportunities
Investment banking also pays you back in the long term, as your exit opportunities to industry will be plentiful, and you’ll be brought in at much higher levels than peers of a similar age not coming from IB or consulting.
That’s right – most people who get into investment banking don’t stay for life. The field is extremely competitive and demanding, so you should consider what investment banking exit opportunities might await you, should you decide to change course.
Many people who jump ship from investment banking look to move into private equity, where their skills can help them earn a great deal of money. However, this field can be even more competitive than investment banking, so you’ll have the best chance if you’re leaving investment banking with a great deal of top experience to help you stand out from the crowd.
Others leave investment banking for venture capital. This offers more personal flexibility and independence, with the possibility of focusing your investments more on projects you’re passionate about. However, venture capital can carry a lot of risk, and perhaps most forbiddingly, you need to have a lot of money just to get started.
You may also consider moving into consulting work. You’ll have the best chance if you use your time in investment banking to develop experiences and hone the skills that lend themselves to consulting, including communication.
And if none of those options work for you, you may head into some more sector-specific work, though this will be easiest if your investment banking experience gave you some advanced knowledge and experience relevant to the sector you’re trying to move into.
Now you should have a pretty good idea of what investment banking is and what investment bankers do. From advising on mergers and acquisitions, to helping firms secure financing through bond issuances and stock sales, investment banking really does handle the nuts and bolts of how investors and firms raise and invest money.
Investment bankers are in the curious position of being both front-and-center and behind-the-scenes for a lot of the biggest corporate transactions. As such, competition for jobs in investment banking can be steep, and the work itself can be highly demanding. Hopefully by now you have a better sense of whether investment banking is the right career path for you, and if so, what you need to do to make it happen.
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